WR: Don’t doubt this bull just yet

By Jani Ziedins | Weekly Analysis

Feb 02
S&P500 weekly at end of week

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

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

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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.

LT February 3, 2013

We just hit 14k and the last time we hit that was in 2008 prior to the crash. How do we know this rally is sustainable we dont because of continue government manipulation. Have you seen the volume in the market. Its extremely low. To buy in this market unless short term is very foolish. Apple is a damage company since SJ left. Apple is like netflix almost losing half its stock value. Yes, it has billions but no vision. It is a ship without a captain. Cook is not a great CEO. He had to make the stock give dividends to make it attractive to buyers. I was shock when this quarter came in negative but yet, market still rev up. Prior to Apple coming out people were saying Apple is the bellweather of the economy. And yet market still moves up. This market is a sham. Pull out your money from 401k. Keep money on the side when the market does correct significantly and it will. I dont have to have a Phd to know this market has been elevated by QEs for the last 4 years. Its very difficult to trade in this market.

Why has Apple not yet move up, it wont. Not this years. Who has the money to continue to buy Apple over price products as good as it is. Samsung is comparable but less than an Apple product. Economy is slowly sinking back into recession. War for the last 10 year is winding down. Where do these returning soldier find jobs. I work for the military and tell you know, a lot of guys are worry about finding work.
Be careful everyone. It will fall trust me on that. Its foolish to buy up here in the market based on not good fundamentals but manipulated by the powerful few. Why to keep confidence in the market otherwise we get a repeat of 1929.

good luck everyone. Be careful.

LT

    Jani Ziedins February 3, 2013

    I am a swing-trader and the analysis in Saturday’s post is for the near-term. There is a pullback around the corner, but I expect it will be a normal pullback, not a major crash. I believe we are in the early stages of a 15-year secular bull. There is a lot wrong with the world, but there is always something wrong with the world and economy. I acknowledge all the concerns you have, but the reason I don’t believe they will be an issue is because everyone has been talking about them for a long time. The market can and will crash at some point, but it will be because we are blindsided by something no one sees coming. For example in the summer of 2008 even Wall Street insiders didn’t know what a Credit Default Swap was, heck some of the people who were trading them didn’t even understand what the were. That ignorance is what made the financial system vulnerable, but on the other hand, if average Americans are worried about something, I know I can safely ignore it.

Jon February 3, 2013

Hi Jani,

Thanks for the weekly wrap up!

You give such amazing insight into the $SPX, I’m curious if you’d consider “featuring” a portion of your daily or weekly posts to a trending “bonus stock” or “industry.” I know your posts on $AAPL are sort of in-line with this request, but it would be interesting to also hear your thoughts on relative performance of stocks/industries/issues to the $SPX, be they leaders or laggards. For example, maybe the “bonus” daily coverage for the week could focus on a particular industry or theme (e.g. how government bailout stocks like $GM and $AIG are beginning to show signs of life), or perhaps thoughts on random daily performers that seem to defy their industry and broader index trend.

You already contribute so much to your readership and I’m hesitant to ask for any more than you already do with CrackedMarket. I only ask because I enjoy your writing and voice too much not to put in this request. It would be amazing to see your voice occasionally extended to include featured issues in addition to $AAPL.

Thanks as always Jani, keep up the amazing effort here at CrackedMarket!

Jonathan

    Jani Ziedins February 5, 2013

    I try to keep things simple and just focus on a few things. I like trading the main indexes because it diversifies away single-stock risk and lets me focus market sentiment, but I do follow some of the most popular stocks that the crowd is likely to get wrong.

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