Monthly Archives: February 2013

WR: Don’t doubt this bull just yet

By Jani Ziedins | Weekly Analysis

S&P500 weekly at end of week

Weekly Review

Markets set another weekly closing high and are maintaining a moderate and sustainable pace of gains in spite of all the calls of overbought.   AAPL bulls are a stubborn bunch and the rebound will take even longer than I originally suspected.

MARKET BEHAVIOR

Stocks closed at a new weekly high and are up five-weeks in a row.  The winning streak’s duration and rate of gains is reasonable when compared to other rallies in recent history.  While it feels like a lot, it is not unusual to see markets string together consecutive up-weeks.  This also illustrates the advantage of looking at weekly charts because it eliminates most of the daily noise and more accurately reflects what the market is actually doing, in this case rallying smartly.

MARKET SENTIMENT

This market is attracting a chorus of enthusiastic and vocal bulls, but a fair number of cynics remain, saying these new highs cannot last.  These cynics are right, but anyone who says the market will pullback is right simply because the market always pulls back.  But as traders, undefined predictions are meaningless because successful trading has little to do with direction everything to do with timing.  You can get the overall direction wrong, but if you have impeccable timing, you can still make lots and lots of money, and no doubt most of us have been frustrated by making the exact right call, but lost money because we screwed up the timing.  Never forget, predictions are meaningless when it doesn’t include timing.

If we focus on the immediate market, the trend is clearly higher and we are not extended yet, so stick with the trend.  Looking back at the last couple years on a weekly chart we can see most intermediate highs occurred when an extended run had a larger up-week than at any point in the rally with the exception of the rally’s first week.  The last surge higher is when bears throw in the towel and sideline watchers can no longer resist the temptation to buy.  This crates one last surge higher and is typically larger than any previous weekly gain.  This large price gain on high volume is the classic capitulation reversal.  Our recent weekly chart does not show signs of this behavior, so the high-probability trade remains to the upside.

TRADING OPPORTUNITIES

Expected Outcome:
Stick with the trend and don’t try to pick a top because this rally has legs.  We will eventually see the surge higher and that will be the sign to short this market.  I have no idea if that surge will be this week or next month, all we can do is watch the market for clues and trade what the market gives us.  Boring trade is sustainable, big gains here are not.

Alternate Outcome:
While markets often surge into turning points, it is not written in stone and we could see the market run out of buyers at any time, especially if the market is caught off guard by an unexpected headline.  But as we saw with last week’s GDP report, this market is not all that vulnerable to negative headlines.  Recent support is at 1500 and breaking this level will force us to reevaluate the bullish thesis.

Investorplace.com poll

INDIVIDUAL STOCKS

No matter how low AAPL goes, people still talk about what a great stock it is.  I heard a professional money manager say when AAPL broke his $470 stop-loss, not only did he keep holding, he added to his position at $450.  What is the point in having a stop-loss if you don’t use it?

I found this poll online that shows a lot of people think AAPL is still a Buy or Hold after falling over 35%.  There is far too much love for this stock for it to bottom and it could take a year or longer to demoralize all these hopeful owners.  Two-weeks ago I was an AAPL bull, but I quickly changed my mind when my initial thesis was proven invalid.  It is normal, even expected to be wrong in the markets, but it is fatal to stay wrong.

Stay safe

PM: What weakness?

By Jani Ziedins | End of Day Analysis

PM Update

The S&P500 defies gravity and AAPL’s unbelievable valuation becomes even more unbelievable.

MARKET BEHAVIOR

The S&P500 responded decisively from recent weakness and threw everyone for a loop as it set another new high. Volume was slightly above average, but lower than recent days. This was the biggest up-day since the Fiscal Cliff pop, but 1% is hardly excessive.

MARKET SENTIMENT

While we need to be careful of a capitulation top, the lower volume shows the market has not sucked in the last the buyers yet. We are watching for a high-volume rally day because it signals the dam of reluctance has finally broken and the last surge of hesitant buyers is rushing in.

This market clearly wants to go higher and it will reveal how much higher in coming days. Successive up-days will signal the last rush of buyers before exhaustion, but if the market takes its time and exercises moderation, expect this to continue for a bit longer.

Everyone knows this rally is over-bought, but that is what keeps it moving higher. We need to keep a close eye on the level of cynicism remaining because it is the fuel that pushes us higher. Reluctant buyers become enthusiastic buyers the higher prices go.

TRADING OPPORTUNITIES

Expected Outcome:
Keep doing what is working; this market is defying all calls for a pullback and that will likely continue in coming days. While this market will eventually top and pullback, you cannot get in front of this. Shorts will get their chance, just not yet.

Buy-and-hold investors stick with your plan, but conservative swing-traders should look to lock in profits. Aggressive swing-traders can hold for more, but keep this trade on a short leash and move up your stops.

Alternate Outcome:
Next week will most likely set another new high and while we could be near a top, there is still plenty of cynicism to fuel a move even higher. If we see more basing and sideways trade next week, hold a little longer. Nothing is certain in the markets and one in hand is worth two in the bush, but you also cannot make money without taking some risks. We will learn a lot more about the mood of the market early next week and that will tell us how to trade this.

INDIVIDUAL STOCKS

AAPL is giving longs heartburn as it turned back from $460 and retested $450. The failure to break $460 is noteworthy and violating $450 in coming days will most likely signal lower prices in the near-term. In my unscientific observations, it seems like there are still a lot of AAPL supporters and those people need to be chased off before the stock will find a bottom. The most loved stock on Wall Street will need to become the most hated before this thing will turn around.

Stay safe

AM: Market frustrates bears

By Jani Ziedins | Intraday Analysis

AM Update

The S&P500 defies bears and rallies to new highs while AAPL continues to frustrate the buy-the-dip crowd.

MARKED BEHAVIOR

The S&P500 bounced off of 1500 and is making new highs again. The three-days of recent selling refreshed the market and it is ready to go again.

MARKET SENTIMENT

Anyone who jumped on the over-bought bandwagon and shorted recent weakness is having a bad day. Just another example of the market abusing counter-trend traders. When in doubt, stick with the trend because it goes longer and further than anyone expects.

This recent strength is winning over reluctant traders who are having a harder time resisting the temptation to buy this market. All the fears from a couple of months ago are long forgotten and while not surprising, it is amazing what a rallying market does to a trader’s view of the world. But the further this goes, the more careful we need to be. These things always end and with each passing day we are one day closer to that end.

TRADING OPPORTUNITIES

Expected Outcome:
The market is defying all expectations and continuing higher. Fundamental and technical analysts are full of reasons this market needs to pullback, but that is the very reason it continues. Keep watching for the cynics to give up and that will be the we find the top, until then stick with trend. If anyone is foolish enough to short this market, take profits within a day or two because they won’t last much longer as yesterday’s shorts are finding out.

Alternate Outcome:
This market will top and it will top in the near future. Maybe that is next week, or maybe next month, but it is out there. We found out this week headlines cannot dent this market so we need to watch for a depleted supply of buyers. As long as traders keep shorting this market, they are creating new demand when they are forced to cover. When the shorts finally give up, that demand will taper off and most likely the market pullback will follow.

We have come a long way and holding out for that last couple percent is getting greedy. No one sells at the top, so either we sell early or we sell late. I’ve never heard of a highly successful investor who sells late and in fact most claim the secret of their success is selling too early. Maybe they know something we can learn from. Maybe this market will top at 1525 or 1550, but for anyone in since 1400 would be foolish to risk those gains for an extra 20 points that might or might not happen.

But it all depends on your trading strategy. Swing-traders should take profits, and long-term traders keep holding and wait for higher prices this summer or next year. Aggressive short-term traders can continue squeezing out the last few drops of this rally, but stay on the long-side until we get a more clear signals this market is topping.

INDIVIDUAL STOCKS

AAPL is having another bad day and retesting $450. The sharp rebound so many were hoping for is dead and once those swing-traders throw in the towel, their selling will put more pressure on the stock. Now that the oversold bounce isn’t happening, who is going to buy AAPL if all the people who believe in the company and stock already own it?

The stock very well might be trading near the bottom of the selloff, but that doesn’t make it a good to stock to own if it will take a while to recover. I’d rather take that money and put it to work. Only when AAPL livens up buy back in. No reason to hold on to dead money. But that is just my approach to trading and each person needs to follow their plan.

Stay safe