AM: The bounce continues

By Jani Ziedins | Intraday Analysis

Apr 09
S&P500 daily at 1:51 EDT

S&P500 daily at 1:51 EDT

AM Update

MARKET BEHAVIOR
Stocks are higher this morning as they bounced off of 1560 and currently above 1570.  If today closes in the green, it will be the first back-to-back up-day in over three-weeks.  The market fell to 1540 on Friday after a dismal employment report, but climbed steadily ever since.

MARKET SENTIMENT
Bears expected weak employment to trigger a wider breakdown, but this market remains oblivious to any and all negative headlines from pathetic GDP, to Sequester, and now weak hiring.  It is a challenge getting in to the psyche of traders as they buy every dip regardless of the reason or outlook.  Do they know something the rest of us don’t, or are they simply acting out of habit learned from every previous dip this year?

Obviously these moves go further and longer than anyone expects.  We heard calls for a pullback in the beginning of the year, but the market ignored all the naysayers and marched higher ever since.   Rationally we know this cannot last forever, but it is hard not to get swept up in the easy money of a steady and seemingly predictable rally.

The question we have to answer is if there is real demand for the market at these levels or if this bounce is driven by greedy holders refusing to sell and buying from shorts getting squeezed?  This market acts like it wants to go higher, but for it to move sustainably we need to identify the next incremental buyer is.  A short-squeeze lasts for two days, but without follow-on buying the market will stall and reverse lower.

This market is not acting like I expect and continued buying Wednesday on accelerating volume will force me to reconsider my pessimistic views.  That doesn’t mean I will buy the market, I will simply step aside until it starts behaving in a more predictable way.  We cannot always be in tune with the market and there is no reason we need to have a trade on.  Sometimes we just have to admit we don’t understand what is going on and wait for the next trade.

TRADING OPPORTUNITIES

Expected Outcome:
Is today’s pop real buying or a short squeeze?  One is sustainable, the other is not.  I am not a fan of the market at these levels and the trading pattern over the last two-days reeks of a short-squeeze.  Intraday trade surges is in bursts of maximum pain as it devours shorts willingness to fight this rally.  Bears are dumbfounded and bulls are gloating.

This rally is the Energizer bunny and just won’t quit.  But no matter how long it lasts, it cannot last forever and will eventually come down.  This rally is almost 5-months old and we are closer to the end than the start.  Obviously the market is not done rallying, but we are standing on a trapdoor and one of these dips is not going to bounce.

Alternate Outcome:
Holding above 1560 through Wednesday’s close shows this market still wants to move higher.  Short squeezes are short-lived and continued buying through Wednesday will show four days of solid buying after Firday’s opening low.  I don’t know where this new money is coming from, but it shows people are still excited about buying this rally.

AAPL daily at 1:51 EDT

AAPL daily at 1:51 EDT

INDIVIDUAL STOCKS
AAPL reversed from early weakness and is back in the upper $420s.  The stock might hover in this area until earnings in a couple weeks.  The views on this stock are polarized between bulls and bears.  Either people love this stock or they hate it.  These extreme opinions likely mean a decisive move following earnings as one side wins and the other loses.  Holding through earnings will be more betting on a spin of the roulette wheel than investing.

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.