AM: New all time highs on the Dow

AM Update

All-time highs on the Dow, 52-week highs on the S&P500 and AAPL bounced back from recent selling.  All is well in the world for the time being.

MARKET BEHAVIOR

The market gaped above 1530 at the open and marched on through 1540 by mid-morning.

MARKET SENTIMENT

A lot of fanfare over the Dow setting a new all-time high and no doubt that headline will be repeated through non-financial news outlets.  This is another big step in overcoming the average Joe’s aversion to equities.  This is not a switch, but over time the market will seem less risky the higher it goes and the gentle thaw will bring a steady stream of new investment over coming years.  The best time to buy-and-hold is when everyone says buy-and-hold is dead.  We will still see brutal selloffs and even bear markets, but in the 100-year history of the markets, each period of 10+ years of stagnant trade was followed by powerful secular bull markets.

Back to the present, we saw a modest short-squeeze this morning, but the breakout is still relatively contained.  We are concerned about excessive and unsustainable buying leading to an exhaustion top.  As explained in previous posts, this market will top on good news, not bad, and we need to watch big up-days with suspicion.  Today’s 1% gain is nothing to worry about by itself, but if we string three of them together, that is noteworthy.  We are still looking for the biggest up-week since the rally began to signal chasing is getting out of hand.

If big gains are unsustainable, a slow grind higher is.  If we keep inching higher with intermediate pullbacks, that shows cynicism is alive and well.  The holdouts are the ones that keep pushing this market higher and the longer they resist, the longer this rally will last.

TRADING OPPORTUNITIES

Expected Outcome:
Keep holding what is working.  If a person wanted to, they could raise their stop to 1515 after today’s gains.  We might see the market dip and consolidate these new levels, but a healthy market should hold above 1525.  The extra 10-points margin gives a little cushion so a trader doesn’t get shaken out prematurely.

1550 is the next stop.  If we pick that up tomorrow, the rate of gains are getting aggressive and should raise a warning flag.  If we trade sideways between 1530 and 1550 for the remainder of the week, that will clear the way for more gains.  We already came 40-points in the last four-trading sessions, so a pause here is normal, health  and expected.

Alternate Outcome:
The last four-day pop is aggressive and pushing us closer to exhaustion.  The low-volume over the las few days shows buying isn’t getting out of hand yet, but everyone knows the market goes two-steps forward, one back, so locking in today’s gains is not a bad idea.  We’re in this to make money and they only way to do that is by selling winners.

INDIVIDUAL STOCKS

AAPL holders are breathing a sigh of relief as the stock regained most of the last two-days of selling, but it is still under the previous lows of $437.  No doubt a lot of late shorts are running for cover in this short-squeeze.  There is no news so the pop is largely driven by supply and demand.  The bigger question is if more buyers will follow the short-squeeze and dip-buying frenzy?  If not, this will be just one of many bounces on the way lower.

The key level to watch is $437 and closing above it shows this bounce can go a bit further, but bumping its head on resistance at $437 makes an interesting short entry with a stop just above $437.  $5 of risk for $30 reward is not a bad trade.  Of course AAPL is a highly emotional stock and it could easily gap $15 higher overnight, blowing well past a stop-loss, so this position should only be made by savvy traders using an appropriately sized position.  The other way to manage and define risk is buying a put-spread.

Previously I said we need a ‘V’ bottom to send a wave of panic through the investor base and finally create a bottom to this selloff.  Two-days and a few percent decline doesn’t count as a ‘V’ bottom because it didn’t trigger that huge wave of emotional and irrational selling that flushes out all hope remaining in the stock.  The last couple days of selling were barely average and we need to see huge volumes of selling to form a capitulation bottom.

Stay safe