LA: Getting close

Look Ahead

MARKET SENTIMENT

It finally happened, the market had the biggest up-week since the start of the year.  Volume was off a tad, meaning the gains were due to lack of selling, not enthusiastic buying.  In fact, Friday’s lack of a short-squeeze on better than expected employment shows we are running low on buyers.  Markets move exclusively on supply and demand, and if demand is drying up, lack of supply is the only thing keeping this rally going.  Holders suffered regret every time they sold and were rewarded every time they sat through a dip.  This has been going on long enough that most owners are now content riding the market higher and ignore any intermediate volatility.  At this late stage in the rally, that is more indicative of greed and complacency than courage and conviction.

The other big catalyst is the end of the first quarter in a few weeks.  It is common for individual quarters to exhibit unique personalities because market participants tend to view the world through the same lens.  Last quarter markets were embroiled with fear over another four-years with a Democrat in the White House and the impending Fiscal Cliff.  Hindsight being 20/20, obviously that selling was overdone and the market rallied strongly as doom-and-gloom was grossly exaggerated.  This quarter has been nearly straight-up as the underinvested were forced to chase at ever-increasing valuations or risk being left behind.  Once the quarter ends, the slate is wiped clean and institutional investors have more freedom and flexibility to make their next move.  If they spent all Q1 chasing, the are likely already fully invested and without new buying, the market will fall under its own weight.

While nothing can tell us exactly when a market will top, these clues indicate we are getting close.  The S&P500 is a dozen points from an all-time closing high and couple-dozen from the intra-day high.  We are so close to these widely followed levels that we will likely be drawn to them.  What happens after that is the million dollar question.  Many contrarians and seasoned  traders will use the all-time high hype to unload stock on to the euphoric masses.  The climax of chasing and wave of profit-taking could be what finally does to this market what no bearish headline could.

TRADING OPPORTUNITIES

Expected Outcome:
Now is the time to be locking in profits, not initiating new positions.  It is likely the market will coast higher over the next couple weeks, but every day brings us closer to the pullback.  We could see the market continue higher early in the week and takeout those all-time highs.  Stretching a six-day winning streak to eight or nine is obviously a dangerous place to buy and any holders should consider selling into the strength.  A modest dip early in the week that finds support above 1530 means we are taking our time in reaching 1575, but those highs are still on the menu.  Failing support at 1530 shows we finally ran out of buyers and the uptrend is broken.  Depending on the circumstances, this violation could finally be the right time to short the market.

Alternate Outcome:
The market doesn’t need to top here and we could only be halfway through this rally.  The volatile pullback to the 50dma refreshed the market by shaking out many weak holders.  Volume has been restrained through the entire rally and doesn’t reek of unsustainable chasing.  Obviously the sign this market is not ready to selloff will be the lack of a selloff.  Trailing stops keeps a trader from selling too early and 1530 is a decent place leave a stop.

INDIVIDUAL STOCKS

In spite of how encouraging support at $420 on the daily chart feels, a look at a weekly chart shows no meaningful support yet.  There is a lot of confusing and misleading noise in daily charts and to really understand what a stock is doing, take a step back and look at the weekly.  The AAPL could be forming a double bottom between $432 and the recent low at $419, but bottoms typically happen on a material change in sentiment, something that still seems absent.  Markets often trade in such a way that hurts the largest number of traders.  It really seems further weakness would hurt a larger number of hopeful holders than a rally would hurt shorts.  At these valuations, more people are interested in buying than shorting and that has been the problem all along.  If everyone believes in the stock and already owns it, who is left to buy?  Look for institutional money managers to continue unwinding their overweight positions into quarter’s end.  Q2 could being new lift back into to the stock, but weakness in the broad market will be a serious hurdle to overcome.

Stay safe