PM: What just happened?

By Jani Ziedins | End of Day Analysis

Mar 08
S&P500 daily at end of day

S&P500 daily at end of day

PM Update

An interesting day in the market that gives us more questions than answers.  AAPL’s underperformance continues and AMZN defies logic and reason.

MARKET BEHAVIOR

Stocks set new highs and closed above 1550 for the first time since 2007.  Today was the sixth consecutive up-day and eighth out of nine, covering over 65-points in two-weeks.  Volume was modestly higher on a day when the employment report came in far above expectations.

MARKET SENTIMENT

It was a fascinating day and leaves us a complicated sentiment puzzle to figure out.   Stocks gaped up at the open on strong employment numbers, but it failed to trigger a short-squeeze or follow-on buying and stocks slid into the red by mid-morning.  After just a few minutes under Thursday’s close, the market found a bottom and ground higher through the day.  Volume was surprisingly average given the level of disagreement between optimists and pessimists.  We had a compelling new data point, but it failed to change many people’s mind and cause them to change their positions.

Lets breakdown what happened intraday to see if it gives us any insights into what people are thinking and how they are positioned.  The open gapped higher as a wave of buy-orders flooded the market in anticipation of a blowout day on the strong employment report.  Some was short-covering, others were headline traders, but within minutes this buying climaxed and the market reversed sharply, giving up 10-points in less than an hour.  This weakness on the heels of unexpectedly good news certainty left people scratching their head, but not long after the market found a bottom and chewed its way higher, finishing near the day’s high.

What happened here?  Obviously new buyers failed to show up after the gap higher.  The short-squeeze never materialized because shorts are afraid of this market after last week’s volatility tore them to shreds.  We might have even seen a bit of selling strength as the market finally broke 1550 and many traders felt six-days in a row was unsustainable.  This early weakness chased out the premature buyers and left others wondering if the market finally ran out of steam.  And to be honest, the market did run out of buyers.  It wasn’t dip buyers that saved the market today, but running out of sellers.  This entire rally is built on a foundation of unflappable holders and story added another chapter today.

The dip on great employment numbers, low-volume, and the slow grind higher kept bear hopes alive.  Cynicism remains and today’s employment report didn’t change anyone’s mind.  Reluctance from those sitting on the outside continues fueling this rally and the trend higher remains intact.  The one noteworthy absence was shorts and going forward we might not be able to rely on their buying each time we make a new high.

TRADING OPPORTUNITIES

Expected Outcome:
It appears sentiment stayed mostly the same in spite of today’s employment gains and the close above 1550.  This means we should expect a continuation at least temporarily.  We still need to be cautious of accelerating gains on increasing volume, but a pullback to 1545 and sideways trade next week will set the stage for more upside.

I moved my trailing-stop up to 1530 and don’t expect the market to touch this level until it is forming the right side of the head in a head-and-shoulders pattern.

Alternate Outcome:
I expect modest gains before topping in a H&S pattern.  That leaves two alternate outcomes, an immediate crash and a continuation higher.  Today’s dip on good news showed buyers are a scarce and even bullish news won’t get them off the sidelines.  We need to use a trailing stop-loss to protect recent gains from a market meltdown due to a lack of buying.

A more interesting idea is we are only half-way through this bull rally.  Last week’s pullback to the 50dma flushed out weak holders, clearing the way for a larger continuation.  It is not hard to find past examples of long rallies that had a midpoint check-back to the 50dma.  At this stage I am holding and looking for an exit, but both alternative outcomes are at the front of my mind and I am searching for any clues to support either alternative.  Next week will give us more clarity and help us identify the high-probability trade.

INDIVIDUAL STOCKS

AAPL remains stuck between $420 and $435.  Oversold stocks are like a rubber bands and snap back quickly.  Trading flat for a week moves us outside the window of a quick rebound.  AAPL’s trend of underperformance continued as the stock was only up a quarter-percent as compared to the index’s nearly half-percent gain.  Anyone still holding this stock because it cannot go any lower is about to learn a lesson in market extremes.  The market is full of great stocks and there is no reason to hold on last year’s big winner hoping for a bounce when there is so much more to choose from.

AMZN daily at end of day

AMZN daily at end of day

NFLX continues trading above $175.  The longer we hold here, the more support the stock builds and the better chances are for a continuation.  I’d still be wary of a dip under $175 setting off a wave of stop-losses, but for the time being the stock looks good.  If someone absolutely must short this stock, only short after the stock breaks $175 and take profits at $160.

AMZN is defying skeptics, trading up to $275.  The overpriced stock that is supposed to selloff keeps holding up while everyone’s favorite stock continues breaking down.  Success in the market isn’t about investing in what should happen, but what will happen.  If too many people believe something, supply and demand will force the market to do the opposite thing.  AAPL and AMZN are perfect examples of contrarian trades.

Stay safe

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About the Author

Jani Ziedins (pronounced Ya-nee) is a full-time investor and writer who has successfully traded stocks and options for more than a decade. He earned a B.S. in Mechanical Engineering from the Colorado School of Mines and an MBA and M.S. Marketing from the University of Colorado Denver. His prior professional experience includes manufacturing engineering at Fortune 500 companies, structural engineering, small business consultant, collegiate instructor, 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 young children.

scott March 9, 2013

It certainly looks like Jan and Feb, a move higher then dead quiet during opex week, then volatility returns shortly after. If I were to guess, we have a “nothing to see here” week, and then see who runs to book profits before quarter end-type of volatility.

Dec to March has to be the easiest to trade segment of the entire year. Maybe you can talk about the seasonal market tendencies……because you know damn well, it gets tougher by mid to late april…

txfa March 9, 2013

For weeks you have been driving this message that AAPL is going lower because 1- too many hopeful are holding on and it does not get a good flush, to $360, $320??? 2- all the knife catchers, bottom callers, dreamers, are buying around $420 and not doing any favor to APPL. This damn herd mentality is just working against AAPL.
However when it comes to NFLX staying around $175 “The longer we hold here, the more support the stock builds and the better chances are for a continuation.”
and when it comes to AMZN the herd mentality is the one that keeps it going
“If too many people believe something, supply and demand will force the market to do the opposite thing. AAPL and AMZN are perfect examples of contrarian trades.’
I never totally understood the “art” of chart and TA, but I would take it if we predict AAPL doom based on TA. However IMHO doing fundamental analyses and keeping different standards for different stocks based on a bias is outright dangerous.
good read as always.

    Jani Ziedins March 9, 2013

    The basis for these calls are not TA, but sentiment. Everyone loves AAPL and thinks it represents a once in a lifetime opportunity at these ridiculously low valuations. If you read between the lines, what everyone is really saying is they already own AAPL and are simply waiting for the expected rebound to make them rich. But question no one is asking is everyone already owns AAPL, who is left to buy and push the stock higher? That is why the stock keeps falling no matter how attractive its valuation is.

    NFLX and AMZN fall on the other side of the fence. No one believes in these stocks’ obscenely high valuations and parabolic moves. These are the most obvious bubble around now and it is only time before the implode. Again if we read between the lines, everyone is saying not only are they not in this stock, but have a huge short position in it. From a supply and demand standpoint, if all the doubters are out of the name, who is left to sell? And with all the shorts, they are built in buyers, forced to cover every time the stock climbs beyond their stop-losses.

    AAPL keeps sliding because it cannot find buyers and NFLX and AMZN keep rising because lack of sellers keeps supply scarse. Obviously AAPL will eventually find a bottom and NFLX and AMZN will slip down to more normal valuations, but we are not there yet.

      scott March 9, 2013

      The problem is that supply/demand imbalance is easier to see with aapl as opposed to nflx and lnkd. A valuation by P/E terms becomes less relevant when no one can buy the company outright.

      People have to realize that the earnings power of a company is only priced at a high level when someone can buy that growth as a boost to their internal IRR.

        Jani Ziedins March 11, 2013

        That is true on a sustainable basis. There are companies like WMT and MSFT that grew into their huge valuations during their early days. But supply and demand can be skewed in the near-term by momentum and sentiment. This phenomena lead to the proverbial bubble and is what everyone is afraid of with NFLX and AMZN. Both stocks have already corrected massively from prior bubbles and many investors are concerned it is happening again. As a shorter-timeframe investor I don’t mind bubbles and will ride them higher. The challenge is knowing when there is upside left and when it is collapsing for real. Right now both stocks are showing signs of wanting to go higher. There is no reason for a conservative investor to own either of them, but at the very least no one should be shorting them since they are such crowded shorts.

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