AM: New highs

AM Update

The S&P500 breakouts out to new multi-year high, defying all the naysayers.  AAPL is coming back to life but is this a sell the news trade?  AMZN and NFLX are flat, but that is supportive given how many people are gunning for these stocks.

MARKET BEHAVIOR

Stocks popped above 1515 in early trade and are holding these levels midday.  New highs are forcing shorts to cover, but we have not decisively broken this level and no doubt some shorts are still holding on and hoping for a fade into the close.  These reluctant buyers could trigger a second leg higher this afternoon if strength continues.

MARKET SENTIMENT

The financial press is attributing this breakout to recent data, but the truth is people are under-invested and this pop clearly shows that.  I can’t get away from all the “experts” claiming this market is too bullish, but they are letting their own views bias their analysis.  The failed breakdowns and successful breakouts shows this market is anything but overly bullish.  Each dip fails because all the cynics are already out of the market and the selling pressure dries up quickly.  Each breakout succeeds because all the cynics are scrambling to cover their shorts and the strength is turning bears into buyers.  Simple supply and demand.

It isn’t all that difficult to figure out what the market is going to do next, the biggest challenge is looking at the market objectively.  People see what they want to see, not what is really there.  I don’t pay much attention to what I think the market should do, but instead focus on what other people think it should do.  The market is not driven by fundamentals or technicals, but by other traders.  Figure out what they are thinking and how they are positioned and everything starts making sense.

TRADING OPPORTUNITIES

Expected Outcome:
The market wants to go higher and is still buyable for a quick swing-trade.  We should hit 1525 next week, but maybe we selloff a little first or we jump right there, it really depends on how stubborn the bears are.  Will they stick with their shorts or will they admit defeat and cover?  Either way the trend is still higher.

How much higher depends on the pace of gains.  If this market takes off with some of the largest weekly gains we’ve seen, that is a signal to get out.  If the market continues trading modestly, look for the rally to continue.  The interesting thing to watch is if volatility continues or calms down next week. Volatility is a warning sign of indecision and a changing personality, often preceding a change in direction.

Alternate Outcome:
The market has put some distance between itself and 1500.  The next time we test this level, the market probably won’t hold.  Any dip below 1505 should be met with a high level of skepticism.  Current price action indicates a continuation, but the market can surprise us at any moment so be ready for it.

INDIVIDUAL STOCKS

AAPL is adding to yesterday’s gains on optimism  it will do something with its mountain of cash.  That is a potential catalyst for the stock, but is it big enough to reverse its downtrend?  I expect the best trade is buy the rumor and sell the news.  Anyone buying the stock needs to ask themselves, is AAPL more likely to blow investor expectations away with some amazing plan to return cash to shareholders, or will it be pathetic and disappointing?  Given AAPL’s track-record,  I wouldn’t expect a lot out of AAPL, if it does anything at all.  Plus this is not a reinvention of the product line that will drive huge sales growth, profit margins, and earnings.  Most income investors buy a stock for dividends, not capital appreciation, so while an increased payout would be nice, don’t expect the stock to return to old highs on distributing cash to shareholders.

AMZN tried to breakaway from the 50dma but is retesting it by midday.  With so many doubters, holding support is a win and as long as AMZN remains above the 50dma, look for a continuation.

NFLX is trading sideways and resting at $180, also strength given how far its come.  I still wouldn’t short this stock and there is probably more upside remaining.

Everyone loves AAPL and is suspicious of AMZN and NFLX.  Fear what is safe and embrace what is feared.  Often the contrarian trade is going with the trend and that is the case with these three stocks.

Stay safe