PM: Sequester time

By Jani Ziedins | End of Day Analysis

Feb 28
S&P500 daily at end of day

S&P500 daily at end of day

PM Update

Stocks held yesterday’s big gains, but late selling on sequester worries is giving traders second thoughts.

MARKET BEHAVIOR

Stocks traded higher through the day but fell apart in the last two-hours, finishing near flat.

MARKET SENTIMENT

The market cracked after the Senate rejected two sequester proposals, but as worrisome as the last hour looked, the market still finished near Wednesday’s highs.  No doubt selling will continue Friday as the automatic sequester cuts kick in, but most of the weak holders already bailed in the recent dip, meaning a large part of that nervous selling already happened.  Everyone knows sequester is coming and most have so little confidence in our politicians that a breakdown in negotiations will surprise few.

Sequester gridlock could weaken the market, but it will come from a lack of willing buyers, not a flood of sellers.  Anyone who can’t stomach volatility sold earlier this week.  Remaining holders are more calm and confident and won’t stampede for the exits at the first signs of trouble.

Sequester cuts or not, the economy will continue improving no matter what happens and the stock market will quickly move past this drama.  Obviously cuts in govt spending won’t help the employment situation and it will delay the recovery, but we will get past it and any dip will be another buying opportunity.  If a financial meltdown, 10% unemployment, and European Contagion couldn’t kill this bull, what are the chances some govt spending cuts will?

TRADING OPPORTUNITIES

Expected Outcome:
It will be interesting to see how weak the market is on Friday if a deal fails to materialize.  Will it be a 15-point dip or a 50-point plunge?  My money is on the former, but that is what stop-losses are for.  Most of the paranoid are already out of the market so I don’t expect a mad rush for the exits.  Between unemployment, money printing, deficit spending, stimulus, Obama’s reelection, the Fiscal Cliff, Debt Ceiling, and now the Sequester, anyone who thinks these things are a big deal is not in this market and their opinion no longer pressures market prices.

If sellers keep their cool, the future of this market rests in buyers’ hands.  Look for initial reluctance, but that hesitation will fade once the world holds together and life goes on.  The key level of support is 1500 and the rally remains intact as long as we hold this level. There are just a few weeks left in this quarter and the pressure will be on for underperforming money managers to catch this market.  Expect their buying to fuel the next leg of this rally.

Alternate Outcome:
If the Sequester negotiations get particularly nasty and entrenched, this could lead to more serious govt funding issues down the road (debt ceiling).  As we saw last week, the herd can panic on seemingly benign news from halfway around the world.  A sequester impasse could trigger another stampede for the exits if everyone starts selling just because everyone else is selling.  I don’t expect this, but we have to be prepared and stick with our stop-losses just incase.

INDIVIDUAL STOCKS

AAPL is barely holding $440 and broad market weakness will send it to a new low.  The stock would have bounced already if it was unsustainably over-sold, meaning it’s not oversold yet.   Stocks often bottom in a ‘V’ and if AAPL is going to do that, it needs to form the left side of the ‘V’.  Most likely there is one last flush lower before this stock will finally demoralize the hopeful and find a bottom.  Any long-term holder needs to be mentally prepared to sit through this kind of volatility.  The worst thing will be riding this stock all the way down, only to bail out just before it finally rebounds.

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.

spearchew March 1, 2013

I’m sure you don’t want this blog to descend in to some sort of Q&A / Trading Forum, so I’ll just shoot this out once.

Do you consider there to be any value in monitoring “time-based pivots”, i.e. Monthly / Quarterly / Yearly opening price. The significance being these levels might serve as P/L benchmarks for institutional traders, and therefore might be defended / targetted?

The reason I thought to mention this here; the focus of this blog seems to me to be more-so on the hmmm, “human element” of the market, rather than fundamentals / technicals, if I can put it this way.

    Jani Ziedins March 1, 2013

    You’re absolutely correct, to me the market is nothing more than a group of people trying to take money from each other. The only thing that matters is what people think and how they are positioned. Fundamentals and technicals are secondary at best because they don’t drive the market directly, only influence the way people think about it. Often the fundamentas and technicals are irrelevant if they don’t change the way people think. For example additional bearish news will not change the positioning of a pessimist who is already out of the market. This phenomena of positioning is why the market often doesn’t respond in expected ways to news. Take today’s the sequester, we are modestly in the green when everyone expected the market to crash. Everyone who expected the crash is already out of the market and there are no sellers left. Naturally the market will rally on a lack of supply.

    But to your question, I do believe in structural inefficiencies. Quarterly reporting is important for money managers and it affects the way they trade. If a guy is behind in the weeks leading up to quarter end, look for him to get more agressive to close the gap. If he is ahead, he will probably let up and take risk of the table to protect his lead. This is why quarters often have a consistent personality. This quarter’s chasing will probably give way to something else next quarter.

    Fundamentals and technicals are important, but they don’t drive the market. Only supply and demand does. Once you understand what people think and how they are positioned, perplexing and counterintuitive moves start making a lot more sense.

spearchew March 1, 2013

Thanks for the thoughtful response – I will be mulling that over for some time

spearchew March 1, 2013

http://s21.postimage.org/bhqqixix1/time_based_pivots.png

Certainly I’m no expert – but here is my attempt to put 2012 + early 2013 in context of these “time based pivots” that I only recently started to think about.

For that reason I would personally see 1440 as a buying opportunity, rather than assuming by that stage the ES rally had completely failed.

Who knows though.

    Jani Ziedins March 2, 2013

    I agree with your chart and is something I’ve been following for a while. Quarters seem to have their own personality. This quarter is a chasing quarter and recent support indicates that it will probably continue the next few weeks. Once everyone chases into the end of the quarter, we could see the market pause or pullback because everyone who wanted to, or needed to buy the market already did.

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