Markets finding support, but are we close to the top?
Stocks continue finding support around 1550. We dipped modestly but bounced above break-even by late morning.
Retail sales came in higher than expected, showing the payroll tax and gas prices are not taking too much of a bite out of the economy, but the market responded with a yawn. That means either it was already priced in, there are few people left to buy the news, or the market simply doesn’t care about fundamentals right now. Lets look at how these various explanations affect where we are headed.
Given the market’s recent rise, it isn’t surprising a fair amount of good news is already priced in. The long rally also has a calming effect on the traders, helping them forget about their worries. If traders feel pretty good about the state of the world, they are likely fully invested. But if most are fully invested, who is left to buy good news?
Everything I see says this rally is running out of gas, but that doesn’t mean this is the top. Momentum can easily carry us higher. In addition, tops are often volatile and indecisive as buy-the-dip traders fight it out with top-pickers. This back-and-forth can chew up a traders in no time if they react to each dip and bounce.
1565 is clearly in the market’s sights and it is a coin flip if we get there. Buying after such a strong run is clearly late in the game and doesn’t provide a favorable risk/reward. Shorting here is also a bit premature because the up-trend is still intact and it would be nothing more than a gambler’s game of picking-a-top. While that can be fun, it usually isn’t profitable. All of us are in this because we love the challenge of the markets, but we often forget we don’t always need to have a trade on. In fact forcing a less than ideal trade is how smart investors often give up most of their hard-earned profit.
The market is entering an indecisive and volatile period as it bases and gets ready for its next move. Markets often top fairly quickly, so holding 1550 for another day bodes well for the continuation. Failing to close above 1550 on Thursday shows demand is struggling to keep up and the market will likely encounter a bout of selling.
The market could easily go either way, so it is hard to justify a trade here. Wait for it to show its hand and then grab on.
These signs of topping can also count as resting. We’ve come a long way and it makes sense for the market to slow down. Sideways is often a way the market catches its breath before continuing higher. But for the market to continue higher, it would be helpful to see more traders calling the top and following that talk up with selling and shorting the market. Seeing it hold up in the face of that wave of cynicism demonstrates it still has room to go.
The biggest challenge with subjective sentiment analysis is the risk of confirmation bias that skews a trader’s view of what ‘everyone’ is thinking. As this market rallied, I kept hearing bears say how bullish everyone was. But the interesting thing is I heard more bears talk about bullishness than I heard firsthand from bulls. Obviously these bears had a preconceived bias and they sought out data that supported their existing views. This is not all that different from buying a Honda and suddenly it seems like everyone is driving a Honda. The number of Hondas didn’t change, just that you now notice them. Bears focus on bullish opinions and bulls on bearish ones. The hard part is seeing what is really there, not just what we want to see.
The chop in AAPL continues. Up one day, down the next. The stock is mostly holding between $425 and $435 with occasional excursions a few dollars above or below. Look for a breakout either way to have some legs because this is becoming a closely followed range. A break above will trigger a wave of buying and a dip below will setoff selling.
The sideways trade shows the stock is not over-sold and primed for a sharp bounce, so anyone trading that thesis needs to reevaluate. Chances are the breakout/breakdown will be short-lived and anyone trading that move should take profits early.
NFLX is launching off of support and putting the hurt on bears again. Stocks that are too-high most often continue higher. Trade the momentum, don’t fight it. Arguing with the market is one of the surest ways to give money away.
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.