WR: How safe is this market?

S&P500 weekly at end of week

Weekly Review

A modest up week in the markets as we continue flirting with all-time highs.

MARKET BEHAVIOR

Stocks added a modest 0.6% this week and closed just above 1560.  The market is 45-points above the 10wma and 127-points over the 40wma.  Weekly volume was average as the range narrowed to 16-points.  Everyone is watching the headline levels 1565 and 1576, the all-time closing-high and all-time intraday-high.

MARKET SENTIMENT

Tight trade following the previous week’s large gains is either consolidation pointing toward higher prices, or the market running out of steam after an extended four-month run.

No matter what is going on in the market, there are always two valid points of view; half the money thinks prices represent a bargain and half thinks they are overpriced.  The market price is the exact balance point between these two views.  If expectations change, traders buy or sell until the price moves enough to reestablish the perfect 50/50 balance.

Here we have half the market expecting the rally to continue and half thinking we are running out of buyers.  Both sides have smart, intelligent  and thoughtful proponents, the challenge for us is figuring out which side is more likely to be right.

Further complicating the analysis is both sides could be right.  We could rally a bit more before finally running out of buyers.  This is why trading is one of the hardest ways to consistently make money.  Not only does our analysis have to be right, but we also must get the timing right.  In most industries the harder you work, the more successful you’ll be, but not in the markets.  It doesn’t care how hard we work or how smart we are.  The only thing that matters is if we buy lower than we sell.  In fact it’s been shown a lucky monkey with darts outperforms many of the smartest minds on Wall Street.  If that isn’t humbling, I don’t know what it.

Anyway, I’m getting sidetracked.  The market is either peaking here, or continuing.  If we use history as a guide, uninterrupted six- or eight-month rallies are unusual and betting on a continuation is a lower-probability trade.  Further, the rate of gains tends to slow the further along it is in the rally.  Not only are the odds of a continuation diminishing, so is the potential reward.  If we were to design our ideal trade, would we seek out low-probability, low-reward opportunities?  Hopefully not.  Without a doubt this market can continue higher, but that doesn’t make it a wise trade.

TRADING OPPORTUNITIES

Expected Outcome:
We need to be increasingly wary of this market.  It could easily take out record highs at 1565 and 1576, but what happens after that?  The older this rally becomes, the more comfortable people are with it.  At the start of the year everyone was terrified of Fiscal Cliffs, Euro Contagion,  Sequester, Debt Ceilings, and all that other stuff.  Now the market doesn’t care about negative GDP and Sequester mandated spending cuts.

Given how far we’ve come, we should be looking for ways to get out of this market, not jump in.  Use this strength to lock-in profits or use a trailing stop near 1550 to protect recent gains.

Alternate Outcome:
The global economy is clearly on the rebound and  all the prognostications of doom and gloom failed to materialize.  In fact, I count myself as staunch bull and predict the next 10-years will produce phenomenal returns.    But I still expect intermediate and near-term volatility throughout the secular bull market.  Even though I am optimistic about the future, I expect a pullback is around the corner because the market goes two-steps forward, one-step back.

AAPL weekly at end of week

INDIVIDUAL STOCKS

AAPL is up $11 for the week and this 2.8% gain has many bulls excited this is finally the widely expected rebound.  I get a lot of negative feedback over my critical analysis of AAPL, but rather than persuade me to the bull camp, the sheer amount of cheerleading further convinces me there is still too much optimism in the stock.  Anyone who believes in AAPL already owns all the stock they can handle and there is no one left to buy.  We will see some tradable opportunities as the stock rocks back and forth within a trading range, but strength should be sold, not bought.

Stay safe