WR: New 5-year highs

By Jani Ziedins | Intraday Analysis

Jan 19
S&P500 weekly at end of week

S&P500 weekly at end of week

Weekly Review

Stocks set new 5-year highs, but how much longer can this rally keep it up?  How are you going to trade AAPL’s earnings next week?  Are there other ways trade this than just buying ahead of the announcement?

MARKET BEHAVIOR

The S&P500 broke out to 5-year highs this week and printed levels we haven’t seen since 2007.  Volume for the week was average as most traders returned from the holiday break.

The market is 65-points above the 10-week moving average and 90-points above the 40-week moving average.  (similar, but slightly different from the 50dma and 200dma)  While it is not unusual to trade this high above these moving averages, it makes it less likely we will go significantly higher before the MA’s have time to catch up.  There are two ways the market closes the gap, one is dipping back to the moving averages, the other is trading sideways and letting them catch up.  The 10-week moving average is turning up quickly and the 40-week is edging higher as well so we might have to wait too long before resuming the uptrend.

MARKET SENTIMENT

What a difference a week makes.  Last week’s negative headlines disappeared and all of a sudden the world is a much better place.  This is a bit of an exaggeration, but the market’s attention has moved away from pessimistic worries and is focusing on upbeat data that justify the recent strength.  This is the typical tail wagging the dog that goes on in the financial press.  Journalists look to see what the market is doing and then dig to find plausible reasons to explain the move.  If the market goes up, they report positive developments.  If the market heads lower, they highlight the negative.  I don’t blame them for this, they are journalism majors and just doing their job, but as traders we have to see through the noise and figure out what is really driving the market.

We came from an extreme oversold condition following the election and no matter what the news was (impending Fiscal Cliff showdown), we were bound to rally because after all the sellers sold, supply dried up and there was nowhere to go but up.  And here we are, 140 points higher and no one can claim the market is still oversold.

So where do we go from here?  The economy is slowly improving, recent earnings have been decent, and politicians are making progress on the Debt Ceiling, but that is what we already know and how traders justified buying this rally.  To get the market heading even higher we need even more.  Either we get better than expected fundamental data or we need these fence-sitters to jump in and start buying.  Without these catalysts, the market will probably trade sideways and let the moving averages catch up.  And this is not a bad outcome either.

TRADING OPPORTUNITIES

Expected Outcome:
Sentiment has improved dramatically in recent weeks and the market isn’t paying nearly as much attention to negative headlines.  The Debt Ceiling is a page three-story as the teflon rally breeds complacency.  I have little doubt the market can keep heading higher next week as we find new shorts to squeeze, but I’m not in the business of picking tops.  I want to make worthwhile a profit and then move on to the next trade.

To clarify, this position is only intended for the more active traders who try to time the market’s regular fluctuations.  Longer viewed holders should keep holding, but expect some near term volatility before the market continues rallying.  While many of you hold for longer periods of time, understanding what the market is doing in the near-term helps manage the anxiety when the market goes through a normal and healthy dip.

Alternate Outcome:
The market can continue climbing from here.  The distance above moving averages is still not at extreme levels and we have room to go.  There are shorts still hanging on and pessimists to be converted.  This could give us one more push higher, but what’s another 20-points gain on a 140-point rally?  If a trader got in early enough, it isn’t worth risking existing profits for a few more dollars.

And don’t get me wrong, I’m not predicting a crash or a sizable pullback, just step back after two big steps forward.  I swing-trade the market and try to take advantage of these smaller market moves.  Depending on market action, next week I could jump back in if I like what I see, but this is my trading strategy and time horizon.  You need to follow what you are most comfortable with.

AAPL weekly at end of week

AAPL weekly at end of week

INDIVIDUAL STOCKS

AAPL had an exciting week as the stock broke recent support at $500 and plunged to $484 before finding support.  Most of the selling was from a high concentration of automatic stop-losses placed under the widely followed $500 level.  But as soon as these autopilot orders were triggered, the market found a bottom because most of the holders who bought during recent weakness are willing to hold through some volatility.  They are value investors taking a longer view on the stock and were not going to let a $15 dip change their entire investment thesis.

AAPL’s earnings are coming up next week and will mark a significant turning point for the stock.  Bears have leaned into the stock recently and the burden of proof falls on them.  The stock sold off in anticipation of slowing growth and shrinking margins and that has been the lead weight dragging the stock down.  If it turns out the concerns were overblown, expect this weight to be cut free and the stock to pop higher.  But there are no guarantees in the market, especially when dealing with such a polarizing stock.  The safer play would be to trade the stock after earnings.  If earnings are bad, the stock will be oversold before value investors step in and prop it up.  If it beats, the stock will surge higher over coming days and weeks.  In either case, the stock would be buyable after earnings and you avoid the risk of holding through earnings.  The one circumstance I would not buy after earnings is if the stock traded flat.  Without an oversold dip to buy or a strong rally to jump on, I’d stay out and look for something better to trade.

Stay safe

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About the Author

Jani Ziedins (pronounced Ya-nee) is a full-time investor and writer who has successfully traded stocks and options for more than a decade. He earned a B.S. in Mechanical Engineering from the Colorado School of Mines and an MBA and M.S. Marketing from the University of Colorado Denver. His prior professional experience includes manufacturing engineering at Fortune 500 companies, structural engineering, small business consultant, collegiate instructor, and managing investment real estate. He is now fortunate enough to trade full-time from home, affording him the luxury of spending extra time with his wife and two young children.

Jon January 21, 2013

I’m curious what your thoughts are of this current market drawing comparisons to late 2000 and early 2008. I continue to read extreme bearish sentiment of the market topping, viewing charts and TA that call for the inevitable “uncontrolled” pullback/crash, and that somehow this run must ultimately suffer the same “technical/historical” fate as all other previous attempts to push past all-time highs. The market is doomed to fail because we are so close to breaking through. As if the resistance looming ahead is an unbreakable barrier, akin to breaking orbit.

With all this naysaying sentiment, I find myself looking less to the charts and more to the world around me. I ask, “what ‘fundamental’ conditions would have to occur in order to break this current bullish trend and reverse markets into the same bearish downtrend witnessed in 2000-2002 and 2007-2009? 2000-2002 had the “dot-com bubble” and 2007-2009 had the “global financial crisis.” Are we currently positioned fundamentally for the next big crisis that sends our markets crashing down? Of course hindsight is 20/20, but I believe the same “bullish” complacency we use to judge a topping bull market runs hand-in-hand, to a certain extent, with public complacency (especially true with the “global financial crisis”). Is the public resting on a similar level of complacency that saw record home sales and unprecedented home loan leveraging by the average American? My current opinion in this regard, is that both the market and Americans are very much aligned in a similar place. Uncertainty and committed to to say that we have truly recovered. We are still very much healing.

Putting aside technical analysis briefly, the question then becomes, what do markets do that are trending up with uncertainty (as opposed to complacency or “bubble” conditions)? Especially as we approach closer to the previous top? How does the fundamental view influence our long-term opinion of where we are going and the panic that naysayers are shouting is inevitable?

    Jani Ziedins January 21, 2013

    I think this is the best time to buy-and-hold since the early 80s. After every period of 10+ years of market turmoil, we get an incredible rally. Just when everyone says buy-and-hold is dead is the best time to buy-and-hold. In fact, I’m confident the market won’t every trade below 1,000 and we most likely won’t ever dip under 1,200 either.

    As for catalysts, supply and demand wise the last two market crashes chased many investors into bonds and it will take the good part of a decade to get all those shell-shocked investors back into equities. They will come out over time and that dribble will keep the secular bull market going. But we also need fundamental reasons to support a 20-year bull market and I think globalization is the next big thing. With 300 million people we were able to find one Steve Jobs and one Bill Gates. Now just imagine if we expand that pool to 3 billion people in the developing world and now find 10 Steve Jobs and 10 Bill Gates! The growing middle class in China, India, and Brazil isn’t just about consumption, but dramatically expanding the pool of brilliant thinkers pushing the world ahead.

    I enjoy trading the market’s daily market fluctuations, but most of my money is still in buy-and-hold diversified investments because I don’t believe buy-and-hold is dead.

Jon January 21, 2013

I think a fundamental outlook such as this is paramount for any investor. Whether you’re long-term bullish or bearish, it’s nearly impossible to plan an actionable investment strategy (i.e. buying AND selling) without a broader conviction of where things are headed.

It’s intriguing to learn that you also subscribe to a buy-and-hold strategy given the critical daily analysis at CrackedMarket. I suppose if positions continue to produce gains, why not continue to hold?

I’m curious how many years of investing were required to arrive at the market clarity you present day-to-day here at CrackedMarket. I started at the end of July 2012 with zero market experience. Does your educational background help in interpreting the political and financial ends of the market?

Also, my understanding was that you only traded $SPY. Do you also trade and invest in specific equities or other financial instruments? Just curious of how you’re applying your talent!

    Jani Ziedins January 22, 2013

    Like any skill it takes years of practice. You don’t want a surgeon or airline pilot that read a few books to operate on you or fly you through bad weather. Same goes for the stock market. Start small and only increase your stake as you prove to yourself that you know what you are doing. I’ve been trading off and on since 2003 and focused on the market obsessively since 2008. The biggest reason I have a large buy-and-hold position is it lets me be more agressive with my individual trading because I know that if I screw up badly, I still don’t have to worry about financial security. If I was investing my entire nest-egg, I would need to be more cautious with my positions and I don’t want to trade the market with do or die pressure hanging over me.

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