PM: All is well with the world

PM Update

The rally continues and all is well with the world.

MARKET BEHAVIOR

Stocks jumped to fresh highs and finished at the top of the day’s range.  Volume was slightly above average.

MARKET SENTIMENT

The market is running in clean air, meaning we don’t have overhead resistance from regretful owners looking to get out at break-even.  Everyone with a diversified portfolio is sitting on profits and that is a big reason traders are willing to hold through modest pullbacks.

Many traders were burned by selling the post-election/Fiscal Cliff dip.  They also bailed after the Fiscal Cliff pop went “too-far, too-fast”.  But as the rally continued, most who sold anytime over the last several months have come to regret that decision.  Fool me once, shame on you; fool me twice, shame on me.  The sellers that bought back in and those that held through the dips are more confident in the market than they have been in quite some time.

What this means for the rest of us is this market will not collapse in a wave of panic selling.  It rallied on negative GDP and it clearly knows sequestration is just around the corner, but it doesn’t care.  If those headlines won’t spook this market, anything short of a terrorist nuclear bomb detonation will not dent it either.

If this Teflon market won’t fall on news, the only thing left is running out of buyers.  The calm and steady climb higher is seducing the remaining holdouts and momentum chasers and shorts covering provided much of the buying today on a headline-free jump to new highs.  This market is no longer trading on fundamentals, but supply and demand.  Holders are not selling and former cynics are chasing.  This is a recipe for price increases, but it is also a short-lived phenomenon.  We will eventually run out of chasers and the last people in the door will have little profit cushion, causing them bail at the first signs of weakness.

This chasing rally can last for weeks or even months, so don’t short this market.  But if we know what we are looking for, we will be better positioned to trade the top when it finally happens.

TRADING OPPORTUNITIES

Expected Outcome:
There are two things the market can do tomorrow, continue higher or pullback to support and consolidate.  A continued surge is unsustainable and will end in an exhaustion top.  A modest pullback to support will spook out some of the momentum traders and tempt bears to re-short this market.  That repositioning clears the way for the sustainable grind higher.

Either way we are getting closer to the end of this run and it is better to be taking profits than initiating new positions.  The time to buy was two and a half months ago when the world was ending, not now when everything seems fine.  There is some upside left in the market, but holding out for top-dollar is often a fool’s game.  We are in this to make money and you can only do that by selling winners.  It is hard to close a position making money, but if the most successful traders sell too early, maybe we should do it too.

I sold half of my SPX trade late today.  I had a trailing stop that let me ride up to the close, but ending at the day’s highs made me take some profits off the table.  We could see this continue higher tomorrow and that will probably get me out of the rest of my position, but if we pullback and find support for a few days, I will look to buy back in.

Alternate Outcome:
Without a doubt this market could go higher and I probably sold too early, but that is what a disciplined trader does.  If this rally is sustainable, there will be other opportunities to get back in.  If it runs up in an exhaustion top, I’ll miss a few dollars of upside, but I would probably end up selling too late and miss the top anyway.  At least when I’m out of the market and have a clear head, I will be better positioned to look for the next trade.

INDIVIDUAL STOCKS

AAPL fell under $460 early and while it recovered from the day’s lows, it was unable to close above $460.  Some of the focus on price levels seems arbitrary, but the power comes from other people trading these same levels.  If everyone looks at $460 as support and places their stop-loss at $459, when the stock dips under this level, it sets off a chain reaction of stop-loss selling.  That is exactly what sent AAPL to $453 in early trade.

Between $460 and $485 the stock is in no-man’s land.  If it cannot regain $460, look for new lows.  If it climbs above $485, look for a run back to $500.  $500 will be a major milestone and significant resistance, but if it breaks through and holds above this level, the rebound is real.

AMZN turned premature shorts upside down again.  In cases like this is it better to be a little late to avoid getting whipped around.  AMZN is a legitimate short, but wait for the stock to dip under the 50dma first.  As long as it holds above this level, the stock is still a buy.

NFLX is within a couple of dollars of $200.  We are getting close to the end of this run and look for a pullback and consolidation before continuing higher.  I still wouldn’t short this stock, but taking profits here after it ran 100% in a few weeks is the smart move.

GOOG is making new all-time highs in an apparent, “what is bad for Apple is good for Google”.  GOOG is a money-printing machine, but most people forget they don’t make any money selling Android phones; it all comes after the fact from mobile search.  Google’s financial statements don’t care if you buy an Android phone or an iPhone, because both use Google as the default search engine.  This can change as we saw with Apple producing their own mapping application, but after that fiasco, I suspect Apple will think long and hard about replacing Google’s search on the iPhone.  Until then don’t get too excited about Android market share gains on the iPhone because it will not translate to the bottom line.

Stay safe