AM: Is the market safe?

AM Update

Markets are aiming for another up-day and AAPL continues lagging.

MARKET BEHAVIOR

Stocks opened modestly weaker, but slowly clawed their way back to break-even and beyond by mid morning.  What is more important than gain or loss is trading tight and supportive of last week’s breakout to 1550.  This shows holders continue holding and are not locking-in profits.

MARKET SENTIMENT

Is this market safe or dangerous?  The sustained rally over the last several months has been a great time to own stocks and an easy ride for most of the way.  But easy is a relative term that only works in hindsight.  Buying the market January 3rd after a two-day, 60-point move was anything but easy, yet here we are up another 90-points.  Conventional tools of fundamental and technical analysis kept many traders on the sidelines, but a speculator that understands market sentiment and contrarian investing was able to harvest some nice gains.

Bears and pessimists have called for a pullback the last few months and while they were slaughtered in this straight up market, eventually they will be right.  Every rally ends and this one will be no different, the only challenge is knowing when to hold ’em and when to fold ’em.  Obviously every new day brings us one day closer to the end and just when we feel most comfortable is when we are at the greatest risk.

Failing to set off short-squeezes is a great sign sentiment is shifting.  This market has largely rallied on the backs of cynics and shorts.  Breakouts were decisive as shorts scrambled over each other to get out.  We’ve seen less of that recently, meaning shorts are starting to give up.  This is HUGE.  It shows doubt is giving way to acceptance.  Traders that were fighting this market are giving up and joining the bandwagon and this means the pool of available buyers is dwindling.

TRADING OPPORTUNITIES

Expected Outcome:
The market will likely coast a bit higher.  All-time highs at 1565 and 1576 are attractive targets and the market will likely be drawn to these levels.  The question is how do we get there.  Will it be a straight run, or turbulent volatility?  Typically we see choppiness at transition points and the shift from rally to pullback is rarely clean.    This is where many traders end up loosing  all the gains they made in the rally.  This is a difficult place to make money and often the most conservative trade is moving to cash and waiting for the next high-probability opportunity.  If someone is reluctant to sell, at least use a trailing-stop to lock in gains.

Alternate Outcome:
The market doesn’t have to do anything and even if its gone too-far, too-fast it can keep going.  If this were easy everyone would be rich.  While the market could continue rallying here, a rally that lasts several more months would need to be at a moderate and sustainable pace.  If a trader gets off too early, there is still time to recognize the mistake and jump back on.  We can only win this game if we sell our winners and most of the time that means selling too early.

INDIVIDUAL STOCKS

What is there to say about AAPL?  It is down when the market is up.  The dip-buying from last week is evaporating and no meaningful follow-on buying is propping-up the recent bounce.  What cannot go any lower is acting like it wants to go lower.  A short trade with a stop above $435 and taking profits around $400 looks like an attractive trade.  Given the explosive nature of this stock, using options would help define risk in the case of bullish news.  The Mar28 $420/$400 put-spread I mentioned last week still looks attractive.

Stay safe