PM: Strength continues

By Jani Ziedins | End of Day Analysis

Mar 04
S&P500 daily at end of day

S&P500 daily at end of day

PM Update

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


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.


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.


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.


AAPL daily at end of day

AAPL daily at end of day

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


About the Author

Jani Ziedins (pronounced Ya-nee) is a full-time investor and financial analyst that has successfully traded stocks and options for nearly three decades. He has an undergraduate engineering degree from the Colorado School of Mines and two graduate business degrees from the University of Colorado Denver. His prior professional experience includes engineering at Fortune 500 companies, small business consulting, 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 children.