PM: All time record!

S&P500 daily at end of day

PM Update
Stocks broke out to new highs.  Will we continue higher, or is this just one last head-fake before the inevitable correction?

MARKET BEHAVIOR
This was the third largest up-day of the year as we smashed record highs.  Volume finally rebounded, but was only average for such a monumental move.

MARKET SENTIMENT
Markets did it again, they humiliated bears for the umpteenth time.  I was bullish for most of the rally, but even I didn’t expect it could go this far.  Previous tops since 2009 developed quickly and this one is stretching on.  That means either 1) this is not a top, or 2) this is a different kind of top and the resulting correction will be different too.

Markets marched relentlessly higher since the opening low on Friday, acting like a giant four-day short-squeeze.  I’d love to say this was real buying, but it is hard to find a catalyst to justify this move other than people buying simply because everyone else was buying.  We haven’t removed a major issue weighting on the market or eliminated a tail risk everyone was fearing.  We didn’t receive unexpected good news proving the economy is far stronger than anyone expected.  We haven’t uncovered compelling insight the future is better than already forecast.  People are simply following the herd and buying because everyone else is.  The last time traders did something simply because everyone else was back in the post-election selloff and we know how that ended.

I really want to believe in this breakout, but I just can’t find a redeeming quality in it other than it is going up.  Obviously I’m wrong, but I’m okay with being wrong if it means staying out of a market I don’t understand or feel comfortable with.

TRADING OPPORTUNITIES

Expected Outcome:
Over a month ago we said one way this rally could end is a strong surge higher.  50-points over 4-days probably qualifies as a strong surge.   The reason surges at the end of long run exhaust a market is the last of the crowd finally rushes into the trade, leaving no one else to buy.

Part of this market’s resilience stemmed from confident holders refusing to sell in the face of weakness.  That kept supply tight and allowed us to rally on light volume.  But how much higher can we go before these investors start locking-in profits?  At some point demand will not be able to keep up with supply and that will be the top.  Obviously we are not there yet, but that day is coming.

Alternate Outcome:
The world is an ugly place.  US equities and Treasuries are not doing well because they are fundamentally sound, but because they are the least bad place for global investors to park their money.  The only reason we look so good is because everyone else looks so bad.  If a person focuses on the qualities of our market in isolation, of course they look poor, but take a step back and it makes sense why there continues to be demand for our equities and debt at these historic levels.  Until there is a viable alternative currency and market in terms of liquidity and safety, everyone will have to hold their nose and buy what we are selling.  Europe was the closest alternative but their financial problems eliminated them from contention.  Its been a long time since Japan was investable.  And it is illegal for foreigners to invest in Chinese companies directly or hold large piles of yuan and they run a surplus so there is little government debt to buy.  None of these global dynamics will change anytime soon, so expect wealthy foreigners to continue pumping money into our markets.

Look for recent resistance at 1570 to act as support.  As long as we hold above this level, look for the rally to continue.

INDIVIDUAL STOCKS
AAPL had a nice comeback and is above $430.  Expect resistance at the 50dma as the stock  trades in a range ahead of earnings in two-weeks.

AMZN daily at end of day

AMZN continues to struggle with the 50dma.  Inability to march ahead is a concern for bulls.  Like most stocks, everything hangs on earnings.  Given the slowing gains and high valuation, there is more downside risk than upside opportunity.  A pop higher would send shorts running for cover, triggering a few day short-squeeze, but a disappointing report could trigger a far larger selloff.  This is a highly speculative trade and option spreads are a good tool to manage risk.

LNKD’s 50dma is catching up to the stock and look for it to provide support.  This story is similar to AMZN in terms of valuation and short interest, the difference is LNKD’s run is far younger than AMZN.  Every move has a lifespan and there is more life left in LNKDs young run.

NFLX was absent from today’s record breakout, but this consolidation is good.  It flushed out chasers and tempted bears to get even more short.  Both of these are setting the stage for another explosive move higher, likely taking out $200 as long as the broad market holds up.

Stay safe