PM: Complacency creeping in

By Jani Ziedins | End of Day Analysis

Feb 15
S&P500 daily at end of day

S&P500 daily at end of day

PM Update

The S&P500 finished the week nearly where it started and volatility dropped off dramatically.  AAPL is testing support at $460 and AMZN is trying to find a direction.

MARKET BEHAVIOR

Stocks traded flat again with support near 1515 and resistance at 1525.  This was the fourth-day within this 10-point range  as volatility virtually disappeared   Obviously this cannot last and it will be interesting to see if the rally uses this quiet period to launch another move higher, or a plunge lower to shakeout complacent and greedy holders.

MARKET SENTIMENT

The market is stuck in this tight range because 1) no one is buying and 2) no one is selling.  Obviously this is only figurative because we had 37 million shares change hands on an options expiration Friday, but for every seller there was an equally willing buyer.

It will be interesting to see how the market trades next week since many trader’s put protection expired today.  This could make it easier to shake these previously steady holders out of their position and would add to down-side volatility next week.  But this factor might be mitigated by the increasing complacency and greed felt by current holders.  Every dip since November has been a buying opportunity and anyone shaken out in a bout of weakness was made to regret that emotional impulse as the market bounce back not long after.  This shame over selling prematurely makes traders less likely to sell the next dip and explains a lot of the recent reluctance for holders to sell dips.

Obviously complacency and greed is a key component of a market top, but they do not lead to a top immediately. A prevailing sense of complacency and greed brings in the last of the reluctant buyers and that forms the top of the market.  Even though we are getting complacent here, there are still reluctant traders left to push the market higher.  Their final buying will likely trigger that last surge higher before the market corrects.

TRADING OPPORTUNITIES

Expected Outcome:
While we are still looking for one last push higher, we might see another dramatic selloff along the way.  The market hates being easy and right now it is pretty darn easy to buy-and-hold.  I have little doubt some heart racing volatility is around the corner, but it won’t get too carried away, maybe a precipitous drop to 1505 before bouncing back.  Tops usually get more volatile as the battle between the bears and bulls evens out and the market’s indecision intensifies.  For those with a weak stomach, it would be far easier to sell into some strength and wait for the next buying opportunity.

Alternate Outcome:
The market could plunge, takeoff, or stay flat next week.  If this predicting stuff were easy we would all be rich right now.  We evaluate the situation, make our best guess, place our bets, and then wait for confirmation or invalidation, and that is what we need to do here.  There is no reason to trade this late in the market rally and often holding out for the last few dollars causes people to give back all their earlier profits.

INDIVIDUAL STOCKS

AAPL daily at end of day

AAPL daily at end of day

AAPL dipped to $460.  While not a long-term support level, it has been a key level since earnings last month, initially providing overhead resistance and now acting as support.  There are many people trading this same level, so a dip under could trigger a wave of stop-losses and short selling, intensifying pressure on the stock.  If the stock bounces here and breaks above $485, that would qualify as making higher-highs and higher-lows, which would be extremely bullish.  Unfortunately sentiment wise there is still too much optimism and hope in the stock to have realistically put in a long-term bottom.

LNKD and NFLX continue inching higher on the backs of pessimists.  Short these at your own peril.

AMZN pulled back to the 50dma but found support for the time being.  A lot of traders are watching this level and look for a move in either direction to pick up speed as swing-traders jump on whichever bandwagon shows up first.

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 17, 2013

Hi Jani,

Any thoughts for your weekly wrap up on how the market opens next week with the abbreviated trading week? Previously, you mentioned extended end-of-year holiday weekends as periods with mild to low volatility with only the junior traders managing stop losses. Expect something similar for Monday?

Also, do you expect individual “bullish” stocks to respond in line with broader index pullbacks? Or will corrections for individual “bullish” stocks be rotational (i.e. some stocks continuing to advance even within the context of broader index pullbacks/corrections)?

$NFLX continues to be an interesting story. Not bad for Icahn who got in at $58 last quarter. 325% return. Wonder when he plans to cash in that position!? Any thoughts on Ichan’s bet with $HLF?

This continues to be interesting times for my trading experience. Looking to pocket a lot of the knowledge I’m accumulating since post-election. Thanks Jani as always for helping to filter through all the market noise and really get down to what the market is telling us!

Jon

    Jani Ziedins February 18, 2013

    President’s day isn’t a major holiday and it is more a day off for traders rather than an excuse to head out of town for a week or two. The pressure is mounting on money managers underweight this market and they are burning the midnight oil trying to figure out ways to catch up with the market before the quarter end. If the rally keeps going, look for them to start chasing in high-beta names and those areas could out perform if we don’t see the expected pullback over the next two weeks.

    As for how stocks will respond in a pullback, look for 75%+ to dip if the market does. The only stocks that will be unfazed will be the darling stocks and I really can’t think of many now that AAPL is no longer a leader. A lot of times it is best to just sit out the pullback because trying to find that 1 out of 4 stocks isn’t a high-probability trade and at best the strongest stocks only go up a couple percent in a weak market. Low-probability, low-return doesn’t make an attractive combination.

    NFLX and HLF are disconnected from reality and are gambling stocks at this point. These are tougher stocks to trade because they react so strongly to headlines, especially HLF. These names are fun to play, but should only make up a small sliver of anyone’s portfolio, something 10% or less.

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