Monthly Archives: March 2013

PM: What will kill this rally

By Jani Ziedins | End of Day Analysis

PM Update

The market is consolidating gains ahead of employment, AAPL is still struggling for direction, and NFLX is building a base.

MARKET BEHAVIOR

Stocks traded flat on average volume, a nice support day for recent gains.

MARKET SENTIMENT

Neither buyers nor sellers were out in force.  Holders prefer holding for further gains and are not cashing in recent profits.  The under-invested are still sitting on their hands, hoping more than ever the expected pullback is just around the corner.

The Dow made new highs and many headlines doubt the sustainability of these gains, but so far there hasn’t been anything unsustainable about this rally.  Volume has been restrained and we checked back to the 50dma last week.  The rally has covered a lot of ground since the November lows, but that is what markets do.  The duration and size of gains are less than other rally legs over the last few years, so by that metric this bull is only  middle-aged.

Friday’s employment report is a major mile-marker and has the potential to wreck this rally.  Most would assume I’m referring to a horrible number that takes us down, but so far this market has proven immune to bad news,  even swallowing a negative GDP report without skipping a beat.  What is more likely to kill this rally is blow-out numbers sending the last of the holdouts scrambling for stock and finally exhausting supply of available buyers. Hitting 1575 over the next few days is more likely to kill this market than another dip to support. Markets often top on good news and a great employment report could be that news.

TRADING OPPORTUNITIES

Expected Outcome:
Expect volatility around employment, but there is greater upside potential than downside.  Last week flushed out most weak holders and buyers that bought in the face of weakness are far harder to rattle.  Current holders proved they will not impulsively rush for the exits and that confidence puts a floor under the market.  On the other side, a strong report will sent shorts scurrying for cover and convince holdouts to chase this market with both hands.  This will finally be our signal to get out.

Alternate Outcome:
Just because previous episodes of bad news didn’t crash this market doesn’t mean it is completely immune from shocking and unexpected news.  The key to breaking this market will be sending it sharply through previous support, triggering a massive wave of panic selling.  This is not a likely outcome given the market’s resilience to swift selling last week, but the higher we go, the more real this risk becomes.  As always, stick with our trailing-stops and don’t fight the tape if it is going against us.  Another dip under 1500 likely kills this rally leg.

INDIVIDUAL STOCKS

AAPL gave up half of Tuesday’s gains when new buyers failed to show up and support the rebound.  The stock is still in free-fall and one day doesn’t make a bottom.  The most bullish scenario is a continued rebound to $455, a dip back to new lows creating a double-bottom, and then a slow and steady grind higher.  The less optimistic bottom is a sharper and deeper selloff leading to a ‘V’ bottom.  Either way expect new lows before this thing is done.  Whether that new low will undercut by $5 or $50 is still up in the air.

NFLX is bouncing along support at $175, but the more followed this level becomes, the greater the risk is if the stock breaks it.  A dip under $175 will likely set off a wave of stop-loss selling and send the stock back down to $160.  But this is actually bullish because it will flush out the late chasers and set the stock up for a rebound on the backs of short sellers.

Stay safe

AM: Consolidation is good

By Jani Ziedins | Intraday Analysis

AM Update

Stocks consolidate after yesterday’s breakout and AAPL struggles to find new buyers.

MARKET BEHAVIOR

Quiet morning in the markets.  We opened higher, but are trading closer to break-even by midday.

MARKET SENTIMENT

This tight trade shows neither sellers nor buyers are showing up in force and we continue consolidating recent gains.  Holders continue holding for more gains and resist the temptation to take profits.  Buyers remain hesitant to chase this market.  This is how traders behaved over the last two-months, so we should expect the current trend to continue until there is a material change in the attitude of either side of the market.

TRADING OPPORTUNITIES

Expected Outcome:
We are looking for one of two possible scenarios; consolidation supporting a continuation, or a surge higher into exhaustion.  Today’s price action supports consolidation and continuation.  Resisting the urge to break 1550 exhibits restraint as slow and steady wins the race.  Staying between 1530 and 1550 for the remainder of the week is bullish.  On the other hand if the market takes off in a frenzy of buying, lock in profits because that surge is not sustainable.  We will never be able to sell the top and the market will inevitably head higher after we sell.  The most successful traders insist the key to their success is selling too early and if it works for them, it works for us.

Alternate Outcome:
The market can breakdown at anytime and bullishness and complacency is increasing with each new high.  The high-probability trade remains higher, but even if the chances for a continuation are 75%, that means 1 out of 4 times the market will fail under these exact conditions.  75% is a great trade to take, but we need to manage downside risk because 25% still a likely outcome.  1515 is a good trailing-stop and we can move that up to 1525 once the market holds 1550.

This market is quickly running out of both upside and time.  At most there are a couple dozen ponts of upside and a few weeks left in this rally.  Its been good run since the November lows and the market needs a break.  Use this time to plan your exit.

INDIVIDUAL STOCKS

AAPL is giving back some of yesterday’s gains.  After the short-squeeze and bottom-fishing, the stock is struggling to find follow-on buyers.   Today’s pause shows just how shallow the pool of potential buyers is and why the high probability trade remains lower.

A short can use $435 as a stop-loss and target a pullback to $400.  Because this stock is so volatile and could explode higher on a news story, the safest way to play this is through options.  Right now a March 28 $420 to $400 put-spread costs ~$6 and has a max profit of $14.  The time aspect of options adds a whole new dimension to trading and can lead to some unexpected behavior before expiration.  Only do this if you are experienced with options, or alternately experiment with a small position to build experience with options.

The above option trade isn’t just for bears either.  It can be used by nervous bulls looking to buy a little insurance against further losses.  The raging bull could further offset the cost of the insurance if he sold two puts at $400 if he is convinced he wants to buy even more AAPL if it falls to $400.  I’m not recommending this trade, just offering it up as a creative way for bulls to manage their position.

Stay safe

PM: Sell the breakout?

By Jani Ziedins | End of Day Analysis

PM Update

New highs, but everyone is still waiting for the pullback.  AAPL finally bounced after selling off for 12 of the last 15-days

MARKET BEHAVIOR

Stocks launched ahead 1% and finished at fresh 52-week highs.  The interesting thing is stocks traded mostly flat after 11am , neither selling off nor adding to early gains.  Volume was higher than yesterday, but still only average.

MARKET SENTIMENT

I don’t follow the Dow because it is a poorly constructed index, but the media and non-investing public does, making it noteworthy from a broad sentiment standpoint.  The Dow set an all-time high today, eclipsing the old record from 2007 and is the first major index to achieve this momentous milestone.  The Financial Meltdown is officially history and this is a significant step in healing the emotional wounds scarring an entire generation of investors.  But this is a multi-year story and it will play out over the next decade as these shell-shocked investors start wading back into equities.

A lot of traders remain reluctant to buy the new highs and are waiting for the inevitable pullback.  It didn’t happen today, but maybe tomorrow, or so the logic goes.  The truth is we will continue higher until people stop waiting for the pullback.  Right now stock holders are feeling good about themselves.  Anyone with a broadly diversified portfolio is sitting on profits and are eagerly awaiting additional gains.  Traders out of the market are feeling the pinch as they wait in vain for the breakdown that still hasn’t happened .  Obviously no one want to chase a breakout to new highs, but how much longer can they watch the market go without them?

While the last three-days of gains were decisive, they came on low-volume.  This rally isn’t a story of frenzied buying, but scarce supply as holders are not interested in selling.  Sometimes low-volume is a warning sign, others it signals a continuation.  After repeated low-volume rebounds to new highs, I don’t need to tell you which one applies here.  Right now the savvy trader is embracing the low-volume rally and fearing the high-volume surge.  When the crowd finally rushes to buy, we will take our cue to exit.

TRADING OPPORTUNITIES

Expected Outcome:
The market can do two things here, surge higher or pullback and consolidate gains.  The surge will be the last gasps of this rally before it collapses in exhaustion.  A dip tomorrow and sideways trade through the remainder of the week signals a more sustainable continuation.  We will see more chasing going into quarter end, meaning there are still a few weeks left in this rally, but we could see a couple of days of weakness first.

Alternate Outcome:
We came a long way and a lot of people are long this market.  Last week’s pullback likely put in the left shoulder of a head-and-shoulder pattern, meaning we are getting close to the top of this move.  While I don’t think today set the top of the head, we still need to honor out trailing stops to keep us from riding a winner back into the dirt. Selling  last week took some downside volatility out of the market and while a dip to 1525 is reasonable, falling under 1515 is more worrisome and a good place to set a trailing stop.

INDIVIDUAL STOCKS

AAPL bounced nicely and recovered a couple percent of the recent selloff.  While the bounce is interesting, buying it is still catching a falling knife.  12 of the last 15-days were negative and the stock shed over 10% in three-weeks.  The stock continues making lower-lows and lower-highs and is not a worthy buy candidate until it breaks this trend and finally makes a higher-high.  There is a minor high at $455 and a more meaningful high at $485.

Today’s bounce could continue higher on broad market strength, but the trend remains lower.  The market often moves in a direction that will humiliate the greatest number of traders.  It seems today’s bounce brought relief, meaning the pain trade remains lower.  The selloff will likely continue until AAPL is the most hated stock and everyone is embarased to admit they still own it.  We are not there yet.  It is a great company, the problem is no one is interested in buying the stock.

Stay safe

AM: New all time highs on the Dow

By Jani Ziedins | Intraday Analysis

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

PM: Strength continues

By Jani Ziedins | End of Day Analysis

PM Update

The market is within a hair of new highs and another short-squeeze all while AAPL is setting new lows.

MARKET BEHAVIOR

Stocks closed above 1525 for the first time since setting a new high back on Feb 19th.  We sold off early, but recovered and finished up 0.5%.  This strength is putting recent volatility and weakness in the rearview mirror.  Volume was below average and the lowest since Feb 22nd’s short-lived bounce.   Everyone is watching the highs at 1531 and crossing that threshold is about as certain as anything in the markets can be.  The question is what happens after.

MARKET SENTIMENT

Cynics are finding it harder and harder to resist this market.  There are countless reasons to breakdown but it keeps defying gravity.  This comeback kid is making everyone feel safer and formerly hesitant buyers are finally coming around.  But the real story is confident holders staying put in the face of volatility and weakness.  A lot of critics point to these low-volume rallies, but we continue rising on tight supply, not strong demand.  Contrary to popular opinion, tight supply is sustainable and is why the widely expected pullback remains MIA two-months later.  In fact, high-volume is something to be feared at this stage in the rally because it shows we are consuming remaining demand at an unsustainable pace.

TRADING OPPORTUNITIES

Expected Outcome:
Being so close to new highs, expect most stock owners to keep holding for further gains and supply to remain tight.  Once we breakout, look for the short-squeeze to add fuel to the fire and most likely push us through 1540.  From there it will be a question of profit taking versus chasing.

We are getting close enough to the end of the quarter that many money managers can no longer wait for the expected pullback.  They will start chasing this market so they don’t have to explain to their investors why they missed this strong market.

Alternate Outcome:
This market came a long way and we get closer to the end of this run with each passing day.  The high-probability trade remains sticking with the rally, but we always need to cover our backside just in case.  The market is moving along nicely, but the nearest stop-loss is back at 1500.  Climbing a bit higher will let us move the stop-loss, but for now we have to deal with this extra exposure.  This makes initiating a new position more risky because it is harder to use a tight stop.  The time to buy the market was breaking through 1500.

INDIVIDUAL STOCKS

On a day where the indexes are flirting with new highs, AAPL carved out a fresh 52-week low as the value stock that cannot go any lower keeps going lower.  AAPL is stepping down in $10 increments and today’s dip took us from $430 to $420.  Anyone stubbornly trading this stock on fundamentals is ignoring reality here.  It was a great buy at $600, then $500, and now it will likely test $400 in coming days.

The real problem for AAPL is being over-owned and there are no new buyers interested no matter how cheap it gets.  Regardless of how great the company, if no one wants to buy the stock it will continue sliding.  All the value investors out there need to ask themselves if they are willing to hold through a dip to $350 because this level is not out of the question.  A lot of high-fliers correct 50% and in spite of all the hype and fanfare, the same rules apply to AAPL too.

As for shorts, look for a dip to $400, but don’t get too greedy because we could see a bounce at $400.  Look to re-short the stock when breaks $400 if the bounce fails.  Of course if the stock starts imploding, hold it through $400, but be ready to lock in profits because it will be setting up a sharp ‘V’ bottom once the last of the hopeful have been forced out.

Stay safe

AM: Constructive consolidation

By Jani Ziedins | Intraday Analysis

AM Update

Stocks are consolidating after the recent bounce, but holders keep holding and the rally remains intact.  AAPL is making new lows because it cannot find new buyers.

MARKET BEHAVIOR

Stocks opened modestly lower, and are trading around this level by midday.  Tight trade after the last 10-days of volatility is constructive and supportive of these levels.  The 50dma is catching up and the sideways trade let the market rest for its next move higher.

MARKET SENTIMENT

Holders are happy with their positions and not selling, supporting last week’s rebound.  As we’ve seen over last few months, the biggest hurdle isn’t selling, but lack of buying.  Those out of the market remain skeptical and are waiting for this market to breakdown in the widely expected pullback.  But since holders are so comfortable holding, that breakdown hasn’t happened and the market inches higher on tight supply, not widespread demand.

Bears have stop-losses above 1530 and breaking this level will trigger a wave of short-covering.  This pop will further add to the pain underweight investors are feeling.  There are few emotions more persuasive than watching everyone else make money.  This is why smart people throw caution and reason out the window when chasing bubbles to unsustainable heights.  I’m not suggesting this is a bubble, just using that example to show the power the crowd has in winning over reluctant investors.  The higher this rally goes, the harder it is for cynics to resist and that eroding base of pessimists keeps pushing the market higher.

Between confident holders holding and former cynics joining the rally bandwagon, the rally has the perfect recipe for a continuation.  As we’ve seen multiple times, headlines don’t mean anything to this market and we shouldn’t expect negative headlines to break this market.  We all know markets top, but if this one won’t top on bad news, what is left?  Good news.  As crazy as this sounds, I expect this market will top on good news.  Remember, fundamentals and technicals don’t determine market prices, only supply and demand.  What happens is the final piece of good news wins over the last holdouts and we push higher on their buying.  The problem arises when the last holdouts buy the good news there is no one left to keep pushing prices higher and the market finally rolls over.

Of course the other hurdle this market faces is the end of the quarter.  Money managers underweight and trailing the market will be forced to buy in to quarter’s end.  Even if they cannot catch up, they want to at least show their investors they have all the rights stocks in their quarterly position report.  Because of this window-dressing, look for strong stocks to continue going up and weak stocks to keep selling off.

TRADING OPPORTUNITIES

Expected Outcome:
Today’s support shows very little profit-taking and stock owners holding out for more gains will keep supply tight.  New highs are just a few points away and breaking this level will trigger another short-squeeze.  Look for the market to continue into 1540 when chasing will put 1550 in play.

Fear a strong surge fo buying more than a bad headline.  This market will fail on optimism, not the pessimism that has so far failed to dent the rally.

Alternate Outcome:
This choppy sideways trade could be a ploy to suck in the last buyers.  Tops are often volatile as power shifts from Bulls to Bears and we certainly have that volatility.  While there is often one last push higher to create a double-top or head-and-shoulders, it isn’t required.  The best way to protect ourselves is stick to our stop-losses.  While the market has bounced several times off of support, each further test is more likely to fail.  Double-bottoms are common, tripple-bottoms not so much.  1500 is the level we need to watch and failing to hold it will be a big red flag.  In the meantime swings of 5 and 10 points can be ignored because this is the market consolidating and building a base for a move higher.

INDIVIDUAL STOCKS

AAPL is selling off, creating new 52-week lows.  There are rumors of an iWatch, iTV, dividends, buybacks, and stock splits, but that doesn’t save the stock from its core problem, too many hopeful holders.  Everyone loves AAPL and already owns as much as they can.  If it’s a buy at $550, it’s a steal at $450.   But this is why it is having such a hard time finding new buyers.  When you have a huge pool of holder and small pool of potential buyers, there is little place to go but down.

The problem with a large group of holders is they are just a few dollars away from becoming sellers.  Breaking support and creating new lows is challenging holders resolve and many are giving in.  There are many reasons to own this stock, but any holder needs to be willing to see the stock continue lower in the near-term.  For the swing-trader, continue pressing the short and look for $400 over the next few weeks.  I would be reluctant to keep a short past quarter end since the trade will likely take on a new personality after the mass exodus of fund managers tapers off.

Stay safe

LA: Look for new highs

By Jani Ziedins | Weekly Analysis

Look Ahead

The market clearly wants to go higher, but stay vigilant because the next dip is less likely to bounce.  Look for AAPL’s weakness to persist as money managers dump shares before the end of the quarter.

MARKET BEHAVIOR

The market finished within 1% of a 52-week high in spite of several down-days that tried to break the market.  Weekly volume was above average, not surprising given the volatility.

MARKET SENTIMENT

Last week’s violation of major support at 1500 gave the market every excuse to breakdown, but rather than trigger a larger wave of panic selling, the dip ran out of supply and prices snapped back.  This behavior is extremely insightful for understanding what the market is thinking.  Obviously we had an initial wave of sellers crowding the exits, but no one else followed their lead and soon after the selling stopped.  When the market finally bounced back, holders were rewarded for holding and sellers were humiliated for being impulsive.

This strength is emboldening bulls and humbling bears.  We can take two things from this.  First, holders are more confident and less willing to sell because in their mind every dip bounces.  This keeps supply tight, reduces volatility, and supports price increases.  Second, when the market does dip again, this will be the real thing.  If everyone is holding the dip, yet we are still going down, that means we ran out of buyers and the music has stopped.

TRADING OPPORTUNITIES

Expected Outcome:
Stay long and look for new highs.  The recent shakeout refreshed the market and 1550 is expected and all time highs at 1575 is within reach.  But be wary of any breakdowns because they will be less likely to bounce.  Falling under 1500 shows this market lacks follow-on buying and makes for a stop-loss of last resort.    If we keep making new highs, use a trailing stop to protect gains.  For example, if the market hits 1540, move the stop up to 1520.

Alternate Outcome:
Last week’s price action was extremely bullish, but there are no guarantees and the market could turn lower at any moment.  Give the market some room to move around and digest recent gains, but if dip buyers fail to show up near 1500, they are not coming and we need to get out.  Markets can only bounce so many times before they run out of support and break lower.  The trend is higher and that is the high-probability trade, but always cover our backside.

INDIVIDUAL STOCKS

With just a few weeks left in the quarter, AAPL is running out of time to bounce and save overweight managers.  When portfolio managers become convinced AAPL will not bounce back by the end of the quarter, they will sell ahead of quarter-end so they don’t look foolish being overweight AAPL.  Expect this window-dressing to keep weighing on the stock in coming weeks. But what starts as window-dressing will likely devolve into wider selling as the market dips under stop-losses and flushes out holders who cannot handle any more pain.  This will likely push AAPL to $400 over the next couple weeks.

A steep selloff without a legitimate fundamental catalyst says the stock is finally reaching capitulation.  This will be the ‘V’ bottom that finally put a floor under the stock.  The lack of a fundamental driver means it is a sentiment based move and is finally showing a change in investor attitudes.  But if the stock continues grinding lower, that is more worrisome because grinding bottoms are longer and deeper.  The goal is extinguishing all hope and a slow grind lower means holders are still stubbornly holding on and refusing to let go.  This is like pulling a band-aid, quick is usually better than slow.

ET CETERA

I receive a lot of compliments for this blog and I want to thank everyone for their support and encouragement.  I created a new tab to showcase all the kind words people share and I want everyone to know how much I appreciate it.  Thank you.

Stay safe

WR: Rally wins another one

By Jani Ziedins | Intraday Analysis

Weekly Review

Stocks bounced back from a volatile week and I pissed off a lot of people when I suggested MSFT is out innovating AAPL.

MARKET BEHAVIOR

The market closed the week higher by three-points, but only after some dramatic downside volatility.  The 10wma is within 27-points and we bounced of this key moving average in intra-week trade.  The weekly range was the largest since the Fiscal Cliff pop as the debate between bears and bulls intensifies.

MARKET SENTIMENT

If there was a week for the selloff to finally take hold, this was the week.  We sliced through support at 1500 and bears were after blood.  But much to everyone’s surprise, the market snapped back and regained all the weekly losses in another example of the obvious trade being the wrong trade.  No doubt the market could break wide-open at any moment, but to see it run out of sellers and bounce back so quickly speaks volumes about where this market wants to go.

Recent volatility eliminated any complacency and flushed out most weak holders.  Sellers sold because everyone else was selling, which is common in a herd-style selloff, but we are more interested in the people buying the dip.  These investors are willing to step in front of a freight train and absorb near-term losses because they believe this market is headed higher longer-term.  The most noteworthy trait of these holders is they are not spooked by minor dips and are more than willing to hold through some volatility.  What this means for us is these holders don’t panic and run for the exits at the first signs of weakness and their willingness to hold through volatility actually eliminates volatility because they keep supply off the market.

TRADING OPPORTUNITIES

Expected Outcome:
When in doubt, stick with the trend.  Any weakness over the last two-months has been a buying opportunity and that trend continues.  News cannot bring this market down and any headline-induced dip has been a buying opportunity.  Without a doubt this market will top, but it isn’t ready yet.

Alternate Outcome:
This Teflon market wants to go higher, but is the rally getting too obvious?  Once everyone buys into it we will run out of new money to keep pushing prices higher.  I don’t think we are there yet, but I don’t have a crystal ball and stop-losses protect us from ourselves.  1500 is the line in the sand and another break in the near-term shows this market is running out of traders willing to buy the dip.  I still expect new highs over the next few weeks, but a dip under 1500 invalidates the bull thesis.

INDIVIDUAL STOCKS

Wow did I strike a nerve when I suggested MSFT was out innovating AAPL.  Quite a few people took offense and let me know about it.  At my core I’m a contrarian and when everyone is defending AAPL and ridiculing MSFT, that warrants a closer look.   I am the first to admit I could be wrong, but I am fairly certain MSFT will trade $60 long before AAPL sees $900.  Feel free to disagree because that is what makes markets.

Just to give people perspective on where I am coming from, I was the guy using dialup modems in the 80s call to bulletin boards, I was emailing friends in Europe in the early 90s, I used Netscape Navigator before most people even heard of the internet, I was using Yahoo when it was still hosted on Standford.edu, I had a “HoTMaiL” account long before most people knew what email was, I watched Steve Jobs unveil the original iPhone live on the internet, and I run Linux on my laptop because it is a great operating system that makes old computers new again.  While I’m not a hardcore technology pioneer, I’m certainly an early adopter.  Now I’m stereotyping here, but who has a better idea where technology is headed, someone like myself or some gray-haired investor who bought his first AAPL product a couple of years ago?

As I said, I could easily be wrong because nothing is certain in the markets, but I see real potential in MSFT and am impressed with the direction the company is headed.  Win8 and the SurfacePro have bugs, but everyone forgets what an overpriced piece of junk the original iPhone was.  I am also old enough to remember how ruthless MSFT is in showing up late and crushing the competition.  They don’t need to be the best; just good enough and I think they are more than good enough here.  Plus as a long-time Apple customer, I am becoming more and more dissatisfied with how controlling they are and am irritated with their constant dumbing down of OS X and iOS.  I want to write a lot about this subject, but will continue this discussion another time.

As for sharing these controversial ideas, I have a choice, I can say what people want to hear, which is what the popular gurus do, or I can step on toes and tell people what is really happening.  I’m not in this to make friends; I’m here to share the best investing ideas and insights and will keep doing that no matter how unpopular it is.  As always please feel free to disagree because I will be the first to admit I don’t know everything.

Stay safe

PM: Sequester = buy?

By Jani Ziedins | Intraday Analysis

PM Update

Markets rallied on bad news, what could be more normal than that?  AAPL is making new lows and looks like an interesting short.

MARKET BEHAVIOR

Stocks opened lower as the sequester deadline came and went without a compromise.  Early weakness found a bottom at 1500 and we rallied back through the day, eventually finishing up a quarter percent.

MARKET SENTIMENT

The financial press claims the market rebounded because some positive data (manufacturing activity) was more important than other negative data (slowing in Europe and Asia), but we know better.  The market bounced because it ran out of sellers.  Markets move on supply and demand; nothing more, nothing less.  Today’s developments were largely negative and firmly supported the bear’s case, but the market rallied because all the pessimists sold earlier in the week during the volatile pullbacks.  Without bears selling and putting fresh supply on the market today, we rallied.

Don’t get me wrong, fundamentals are important, but they don’t move markets, only people trading stocks does that.  If new fundamental data changes people’s view of the future, then it will move the market when traders adjust their positions.  But if the news simply reinforces what people already believe, they will keep their current positions and the market will be unaffected because no new trading took place.

This is not an easy concept to grasp, but it is the way the markets work. The worst happened today, sequestration kicked in, but the market rallied.  If someone else can come up with a good reason why markets rallied on bad news I’m all ears.  Contrary to popular opinion, the markets are rational and make perfect sense once you understand why it moves.

TRADING OPPORTUNITIES

Expected Outcome:
How can anyone be anything but long this Teflon market?  Nothing can take it down and it is proving all the doubters wrong.  This market will top because every market does, but it will not rollover for any of the reasons the cynics are pointing at.  This market will top on good news, not bad.  That biggest piece of bullish news will convince the remaining holdouts to jump in headfirst and running out of buyers is how this will end.

Keep buying weakness, but use a stop under 1500 just in case.  Look to take profits after we set a new high and the rate of gains accelerates unsustainably.

Alternate Outcome:
There are no guarantees in the market and it can do whatever it wants next week.  I don’t know what it will do, but we don’t need to in order to make money.  Success in the markets is about understanding probabilities.  If we know what is more likely to happen than not, we trade on this insight, manage our risk, and over time will come out ahead.  We will be wrong, there is no way around that, but as long as we are wrong less than we are right, we win this game.

These recent pops higher might be sucking in the last of the bulls and we are running out of new buyers.  This will exhaust the market sooner than I expect, but sticking with a stop-loss at 1500 will keep our risk manageable.

INDIVIDUAL STOCKS

What is there to say about AAPL?  It made a new low and will probably keep making new lows for a while longer.  Hope is a poor strategy and it will take something more to bring this stock back to life.  Right now it is a far more attractive short than buy.  Anyone who is still holding on figuring it cannot get any worse is about to have that theory tested.

But that is just a sentiment analysis of the stock.  I also think the stock is in hot water fundamentally too.  I’m a bit of a tech geek and have been using Apple products before they were cool and have close to $5k of AAPL hardware on my desk.  But let me tell you, I stopped by the Microsoft store at the mall and they are leading the innovation charge.  My iPhone, iPad, iMac, and Macbook feel dated next to Win8 and the slick touch interface.  Without a doubt AAPL is no longer leading this race and mostly living off its reputation.  AAPL has a lot of catching up to do if it wants to keep its crown.

Stay safe

AM: What sequester?

By Jani Ziedins | Intraday Analysis

AM Update

The market is up in a contrarian trade after sequester cuts go into effect, but the market’s strength is not enough to keep AAPL from making new lows.

MARKET BEHAVIOR

Stocks tested 1500 in early trade as the sequester kicked in, but the market bounced within minutes, rising nearly 20-points over the next couple hours.

MARKET SENTIMENT

The obvious collapse due to sequester is no longer a sure thing.  The market dipped in the first 10-minutes, but that hasty selling quickly exhausted itself and the market bounced decisively.  Sequester is more a media event than an economic one.  It made great fodder on financial and political talk shows, but most market participants realize a 2.4% cut in federal spending will not turn this economy upside down.

Sentiment wise, a lot of the fearful are scratching their head and wondering what is wrong with this market.  As we discussed yesterday, most of the weak hands are already out and no longer have a vote in where this market goes.  When all the pessimists are already on the sidelines, this limits new supply and the resulting scarcity props up prices.

Clearly this market does not want to not top on news, but it will eventually run out of new buyers.  As long as people continue doubting this market there will be fuel to keep the rally going.  What we need to watch for is when everyone embraces this market.  That is when supply of new buyers is drying up and we need to look for an exit.

TRADING OPPORTUNITIES

Expected Outcome:
This was the fourth time people could buy 1500 in the last couple weeks.  When the market surges higher, those that missed the move hope for a pullback, but too often they are afraid of the pullback when it finally happens.  The rule of thumb is if a pullback is hard to buy, it is probably a good place to get in. If the pullback is easy to buy, then it will probably keep going lower.  There is a lot of psychology and supply and demand behind this, but we have two high-profile examples of this between the S&P500 and AAPL.  The hard buy was the right buy and the easy buy was the wrong buy.

Today’s bounce off of 1500 shows this rally still has legs.  Supply is tight because most of the sellers already sold and current holders are comfortable holding.  While volatility will persist, any weakness should find support quickly.

Alternate Outcome:
Obviously there are no guarantees in the market and we need to be wary of a drop under support.  No matter how convinced we are in our analysis, we need to stick to our sell rules.  We will be wrong and that’s okay, but it is criminal to stay wrong.  Right now 1500 is solid support and a material breach of this level will force us to reevaluate our thesis.

INDIVIDUAL STOCKS

AAPL is making new lows and is a far more attractive short than buy at these levels.  The stock continues its underperformance and is down 1.5% when the market is up.  In the near-term this is a sentiment trade, not an investment.  Look for weakness to persist as long as people still talking about value.  Expect selling to accelerate and challenge $400 as many “investors” bailout after pain and regret get too intense.  This stock will eventually become oversold after this last wave of selling and will finally become buyable, it just isn’t there yet.

Stay safe