LA: What to look for

By Jani Ziedins | Weekly Analysis

Feb 18
S&P500 weekly at end of week

S&P500 weekly at end of week

Look Ahead

How far can this streak of up weeks continue and where is the incremental AAPL buyer going to come from?

MARKET BEHAVIOR

Stocks were up for the seventh consecutive week.  Over the last few years this is as long as any streak lasted and we should expect a red-week simply based on historical precedent.  While I’m sure there are many times over the last 100-years where the market strung together a larger number of winning weeks, trading is a game of probabilities and we need to trade what is most likely, not what is possible.

MARKET SENTIMENT

The recent rally and absence of volatility is making the market feel safe, something we need to fear.  I’m not promoting a crash, simply a red-week or two to keep traders on their toes.  How people respond to the dip will tell us how far it will go.  If the prevailing attitude is complacency and buy-the-dip, look for a deeper pullback.  If everyone starts yelling fire and rushing for the exits, look for another quick rebound.

The rule of thumb is trade the opposite of what most expect.  The sharp pullbacks to 1,500 two-weeks ago got traders attention and excited bears.  This was finally the pullback everyone was waiting for, but the market rebounded and is now 20-points higher.  That episode ago humiliated bears and sellers who jumped on the pullback bandwagon only to watch the market pop higher.  Now this group of potential sellers is less likely to pile on board a similar dip in the future.

This matters because nervous sellers and shorts have a limited war-chest and run out of ammunition quickly if bigger money doesn’t join the selling.  That is exactly what happened two-weeks ago.  But what happens if the nervous sellers are already out of the market and bears are reluctant to re-short the market?  That means the next dip isn’t manufactured selling, but real selling.  This is the fundamental difference between a buying-the-dip opportunity and a real market reversal.  If you know who is selling, you have a better chance of accurately anticipating the move.

The above scenario describes the way these things normally play out.  I’m not exactly sure where we are in this process and that is why we need to keep looking for clues from the market’s behavior.  The trend remains higher, but we need to be increasingly cautious with each passing day.

TRADING OPPORTUNITIES

Expected Outcome:
Look for a small red week this week or next simply because history says this is about as far as these things normally go.  This could be a small pullback, or the start of something bigger.  We need to keep a close eye on how the market and sentiment responds to any weakness, looking for clues on where this market is headed.

Alternate Outcome:
While seven up-weeks is a lot, it is not impossible for us to string together several more.  The momentum is clearly higher and reluctant buyers are finally starting to wade in.  Their buying will keep propping up the market until they run out of money and that will be when the market finally noses over.  Running out of buyers, not complacency is what finally causes a market to top.

The outcome I am most hoping for is a strong push higher because that is unsustainable, will clearly signal an intermediate top, and be an attractive place to short the market.  This grinding higher stuff is far harder to predict and time.

AAPL weekly at end of week

AAPL weekly at end of week

INDIVIDUAL STOCKS

AAPL is struggling again and the last few weeks of buying sucked in many of the bottom-pickers.  The question any AAPL bull has to answer is who is the next buyer that will keep the rebound going?  Markets are driven by supply and demand, so where is this new demand going to come from if all the AAPL bulls already own the stock?

My opinion is there is still too much hope and optimism left in the stock to stage a quick recovery.  The most likely scenario is the most loved stock will need to become the most hated stock before selling and hope finally exhaust themselves and the stock can bottom.  The other red flag is any weakness felt by the broad market will be exacerbated in AAPL shares.

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 February 18, 2013

Great market analysis! While I no longer follow aapl like I once did, I have been following your market analysis every day. It keeps me in tune with the bigger picture. My ability to block out noise has increased 10 fold so thank you for your reliable and consistent analysis. I especially love that you do alternative outcomes – shows that you keep it humble!

    Jani Ziedins February 19, 2013

    Thanks. I mostly trade the indexes, but AAPL is a major holding for big and small money alike and is why I cover it regularly. All the attention it gets makes it a perfect candidate my style of sentiment analysis. That is also why I cover some of the other high fliers that have departed reasonable and rational valuations.

    Alternate outcomes is important of my trading plan because it helps me identify an alternative path for the market and lets me move quickly if the market doesn’t follow my expected thesis. Too often people focus on just one outcome and force a bad trade because they are ignoring other signals the market is giving them.

Peto1 February 18, 2013

“so where is this new demand going to come from?”

Buyers will arrive in droves when one or more of several probable catalysts materialize …

    Jani Ziedins February 19, 2013

    If someone doesn’t already own AAPL at this obscene valuation, we can assume they are not interested in it at any level. I just don’t see droves of buyers waiting in the wings. In fact I think just the opposite, there are droves of hopeful holders on the verge of getting flushed out.

      Peto1 February 19, 2013

      “We can assume”

      “We” assume no such thing, Jani. YOU assume, and your assumption is apparently predicated on the false premise that whatever you assume must also be assumed by everyone else – which is wrong since I don’t assume any such thing …

        Jani Ziedins February 19, 2013

        You are also guilty of assuming what other people will do when you say “people will arrive in droves when……”. It is impossible to trade the market without assuming something about the future and we all do it. You assume news will drive the stock higher, I assume lack of demand will push it lower. And we can both be right if the stock dips prior to a major product launch that sends the stock higher. The great thing about the market is two people with opposing views can both be right if they time their trades well.

          Peto1 February 19, 2013

          Well, I guess that’s where we differ. I don’t trade the market. I invest in companies whose fundamentals suggest a strong and well managed business. Where a disconnect arises between a company’s value and its share price I see an opportunity to invest even more because in the long term I know the price will correct to more closely reflect that value. The wild card is, of course, contingency – so I guess anything can happen and therefore we shall see what we shall see …

jon February 19, 2013

My friend is a value investor. He specializes in reading balance sheets and knowing what is going on in a company and he’s pretty damn good at it. He is also the youngest commercial banker in our metropolis and heavily recruited by many companies – he has yet to have 1 loan go bad even in the past recession. Unfortunately he gets nominal returns if not murdered with market timing on his fundamental analysis. Value investing works but timing is everything, hence you can achieve the same results with no fundamental analysis but exceptional timing. If you cant see the big picture using technical analysis all the value investing in the world isnt going to help. Buffet can move the market with leverage, you cant.

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