Monthly Archives: April 2013

PM: Half-full or half-empty?

By Jani Ziedins | End of Day Analysis

PM Update

A little something for everyone as the market gapped lower, but recovered a large chunk of the losses.  Do we buy the dip or sell the bounce?  LNKD’s bucked the weakness and shows there is still strong demand.

MARKET BEHAVIOR

Depending on your point of view, it was a half-full or half-empty day.  Stocks plunged at the open on anemic job growth, but recovered more than half of those losses and finished above key support at 1550.   Bears will point to the selloff and bulls will point to the rebound.  As exciting as the day seemed, volume was simply average and neither buyer nor sellers piled in or out of the market.

MARKET BEHAVIOR

How do you boil a lobster without him realizing it?  One degree at a time.  If the market peaked on Tuesday, bulls are getting roasted one degree at a time.  Rattle their nerves with a poor open, but get their hopes up with an encouraging rebound.  Of course the same could be said of bears and these dips sucking them back in on the short side only to blow them out on the next short squeeze.

What happened today?  Stocks sold off sharply as concern over a weak recover reared its ugly head.  They opened on the lows and rallied 13-points as dip buyers jumped at the opportunity to buy stocks at the lowest level in nearly a month. Every other dip was a buying opportunity so obviously this was a great time to snap up discounted shares.  The problem is that whole “obvious” thing.  If casual retail investors know you “don’t fight the Fed”, doesn’t that mean QEfinity is already priced in?  If everyone already buys into the ideal of a “Bernanke put”, who is left to buy?

Last year everyone was skeptical of QE3 and EQfinity, but up near all-time highs everyone is a believer.  Where did all the cynics go?  Where did the worry about the Fiscal Cliff, Sequester, and Debt Ceiling go?  It’s not like our politicians fixed anything, they just kicked the can down the road and the market has a notoriously short memory.

Now don’t get me wrong, I’m not one of these perma-bears and have been extremely bullish since the November lows.  In fact I think this is the early stages of the next massive secular bull market.  When everyone says buy-and-hold is dead is the best time to buy-and-hold.  But I also know the market moves in waves and it’s been a while since we had our last corrective wave. I’m a contrarian by nature and when everyone is buying the dip, I’m shorting the bounce.

TRADING OPPORTUNITIES

Expected Outcome:
This morning’s selloff and rebound shouldn’t surprise anyone.  Bulls had to thread the needle between too weak job growth and too strong job growth to continue the rally.  The selloff was nearly inevitable since so few buyers were left after a 4-month rally.  But at the same time habits are hard to break and everyone who made money buying the dip had to come back to make easy money.  And given today’s rebound that was the smart play, but profits are only real when we sell.  Anyone buying the dip might come to regret it next week when follow on buying fails to materialize because so few buyers are left to keep pushing prices higher.

Given how far along we are in this rally, buying the dip is the riskiest its been.  That doesn’t mean it cannot bounce, simply every rebound brings us closer to the one that doesn’t.  I don’t have a crystal ball, but I know probabilities say we are closer to the eventual correction and there is more risk than upside at this point.

We will know early next week if the market can hold 1550 or if buying dries up and we continue lower.  Anything less than maintaining 1550 through Wednesday is a concern for bulls.

Alternate Outcome:
This market grew fat feeding on premature pessimists calling a top.  There is no reason it has to top here and can easily continue higher, especially if many are predicting a top.  Sideways trade since early March flushed out profit-takers and weak holders.  These will be the buyers that push the market higher if we bounce back.  While I don’t believe this is the high-probability trade, I am very aware it is a possibility   If the rebound continues and we regain and hold support, that shows buyers are still behind this market and I am way too small to argue with them.

INDIVIDUAL STOCKS

AAPL flirted with new 52-week lows and is just a few dollars above this key level.  Expect a wave of stop-loss and short selling to hit the stock if it dips under $419.  At this point it is obvious the break above the 50dma was nothing but a head fake built on the hopes of desperate holders.  It is hard to find anyone bearish on the fundamental story behind AAPL, meaning most still view it as a value.  The problem is no one is left to buy the stock since everyone already owns it.

LNKD’s strength is impressive and shows there is still ample demand for this stock.  But a weak market will take it down with the rest, so this is a poor place to hideout if anyone expects near-term broad weakness.  When the market resumes the rally, look for this stock to continue leading.

Stay safe

AM: Buy the dip?

By Jani Ziedins | Intraday Analysis

AM Update

Stocks plunge and retest lows of the recent consolidation.  They are attempting a mid-day rebound, but will this finally be the dip that doesn’t bounce?  AAPL is a few dollars from setting a new low and expect selling pressure to intensify if the stock falls under $419.

MARKET BEHAVIOR

Stocks crashed on weaker than expected employment.  It dropped to 1540 before finding a floor and is attempting a late-morning rebound.  Every other dip was a buying opportunity, is this another one?

The recent low at 1538 set on March 19th is acting as support, but watch for a dip under this level to trigger of a wave of automatic stop-loss selling.  The next obvious level of support is 1530, which coincides with the 50dma and Feb 19th’s top.  (old resistance becomes support)  After that it is free fall to 1500 and February’s low of 1485.  A bounce could happen at any of these levels, but expect additional selling pressure if it violates these technical levels.

MARKET SENTIMENT

The recent rally was largely based on finding the sweet spot between growing fast enough to improve earnings, but not too fast to threaten easy money from the Fed.  This morning’s weak employment numbers exposes a vulnerability in the economic leg of the stool the market is standing on.

The justification for buying the dip is this economic weakness means the Fed will not withdraw stimulus anytime soon.  But that is what the Fed has said all along and most traders already priced in.  Everyone’s been buying the market for weeks under the rallying call “don’t fight the Fed”.  How much more money do these bullish Fed traders have left to pump into the rally?

Early trade show people are buying the dip because they are far more excited about the prospect of easy money than fear the risks of a weakening economy.  That was the right trade over the last several years, but is there a limit to the Fed’s effectiveness?  The early bounce is expected, but is smart money buying the dip, or will they sell the bounce?  Declines frequently stair-step lower as traders try to pick a bottom and today’s support could be fools rushing in if buying the dip has become too obvious of a trade.

Markets move exclusively on supply and demand.  Fundamentals, technicals, and headlines are only secondary in nature because they do not move prices directly.  They only affect markets if they change traders’ outlook of the future and cause them to readjust their portfolio.  If a news story simply reinforces existing views, the market won’t respond because everyone maintains their current positioning.  If the bulls expected QEfinity to stick around indefinitely, a weak employment report will not help boost their case because that view is already priced in.  The one thing not priced in was a weakening employment, a lethargic economy, and a threat to corporate earnings.  That is why a bounce on expectations of more easy money is unlikely to last.  Ignore what is already priced in and trade what is not expected.

TRADING OPPORTUNITIES

Expected Outcome:
The value of selling into strength is evident this morning.  Anyone who sold over the last few weeks is eagerly looking for the next trade while the guy who held for the top is stressing between selling or holding.  In theory holding for the top and using a trailing stop sounds better, but it is much harder to execute in practice because it is difficult to contain our emotions on days like today.

Markets often go too far on both the upside and downside.  Obviously November’s low was overdone.  The question is if  March’s highs went too high.  Markets operate on supply and demand.  Thawing fear and pessimism from early in the year provided the lift to record highs, but now the market is fairly optimistic, how many buyers are left to keep the good times rolling?  If every other dip was a buying opportunity, how many dip-buyers are still sitting on cash ready to save the rally?

Every rally comes to an end and this one is no different.  While I cannot say for sure if this rally is done, I know the odds are stacked against it and buying the dip here is riskier than at any other point in the rally.  No one has a crystal ball and success in the markets comes from trading probabilities.  Given the size and length of the recent run, there is more downside than upside here.  Like everything in the market, declines are hard to trade.  A ‘straight’ down move often involves multiple bounces and false bottoms along the way.  Patience is key, trade from strength, and don’t react impulsively to the market’s head fakes

Alternate Outcome:
When in doubt, stick with the trend.    These things go so much further and longer than anyone expects.  All-time highs and recent weakness awakened bears from hibernation.  Markets fall when everyone thinks the dips are buyable, but there could be enough cynicism left to fuel one more push higher.

INDIVIDUAL STOCKS

AAPL is just a few dollars from setting a new low.  Expect a wave of technical selling to hit the stock if it drops under $419.  No matter how great bulls think this company is, no one else is interested in buying to the stock and it keeps sliding.  Bulls might eventually be right, but the stock will likely see lower prices before this is done.  $400 is easily within reach and a pullback to $350 would be a 50% retracement from the highs, something often seen in leading stocks that fall from grace.

NFLX, AMZN, and LNKD are down with the rest of the market.  High beta stocks are a poor place to hide out in through a market correction.  If a trader expects further weakness, sell these stocks and look to buy them back cheaper once the broad market weakness passes.

Stay safe

PM: Looking forward to employment

By Jani Ziedins | End of Day Analysis

PM Update

The market recovered soem of Wednesday’s losses, but will it all be wiped out by Friday’s employment report?

MARKET BEHAVIOR

Stocks reclaimed half of Wednesday’s selloff and closed right at 1560 support/resistance.  Volume was slightly below average, but coming back from the especially light volume of the last few weeks.  It appears traders are returning from vacation and reengaging this market.

MARKET BEHAVIOR

The headline event on Friday is the monthly employment report.  A year or two ago this was a critical data point and a make or break moment for the market.  Once we started printing job gains in hundred of thousands, the market became less obsessed with it and its been a while since it moved the market in a lasting way.  At this point the employment report is nothing but a tool for people to trade their preexisting bias.  The straight forward scenario is strong number = up and bad numbers = down.  But people can flip this on its head to justify acting in the opposite direction.  If someone wants to buy stocks, they will claim a lousy employment report keeps the Fed’s money flowing.  If another person wants to sell the market, they will criticize a strong employment report because it means the Fed will end easing sooner.

News is random, but traders’ reaction to it is not.  The recent run up priced in a decent amount of good news and most buyers are already in the market.  This leaves fewer buyers to push prices higher.  To keep this thing alive, bulls need to thread the needle between not too bad and not too good to prevent holders from rushing for the exits.  It’s entirely possible, but this is the riskiest the markets been since mid-November.

TRADING OPPORTUNITIES

Expected Outcome:
This market has been largely oblivious to headlines and this report will likely be more of the same.  The market is going to do what it wants regardless of some fundamental data point.  It feels like the market is stalling and paranoid holders could use the employment report as a reason to get out.  Even if the market pops, watch out for follow on weakness.  Its taken a lot of buying over the last 4.5 months to get up here and every market needs to take an occasional break.

Alternate Outcome:
Many traders are expecting a pullback for all the same reasons I see.  If this expectation is popular enough, it causes many buyers to hold back, creating fuel the next rally leg.  When buyers wait for the pullback, but the market holds up, this demonstrates solid support at these levels.  Prices head higher once these worrywarts are forced to chase a market that is leaving them behind.  That’s been the recipe for the Q1 rally and it could easily extend into Q2 if cynicism remains widespread.

INDIVIDUAL STOCKS

AAPL cannot get out of its own way and fell another percent.  It is less than $10 from recent lows and threatening to set off a wave of stop-loss selling and shorting if it breaks this key technical level.  Expect many regretful holders to join the selling as the stock drops toward $400.

NFLX is looking for a bottom after breaking support at $160.  The biggest concern the stock getting caught up in bigger market weakness.  If the market breaks down, NFLX and all the other high-flyers are a bad place to hideout.  These high-beta stocks will fall two or three times as much as the market.

Stay safe

AM: Where’s the bounce?

By Jani Ziedins | Intraday Analysis

AM Update

Stock struggle to come back after yesterday’s selloff.  Will they continue the pattern of bounces or give us our fist back-to-back down days in nearly three weeks?

MARKET BEHAVIOR

Stocks bounced back from yesterday’s selloff, but only recovered a fraction of those losses by late morning.  We are trading in the high 1550s, but struggling to break above 1560.  If stocks close in the red this afternoon, it will be the first back to back loss in nearly three weeks.

MARKET SENTIMENT

Wednesday’s high-volume selloff shook some complacency from the market and reminded people there is risk in this game.  Up to this point every dip has been buyable and we are seeing signs of an attempted bounce this morning.  While every previous selloff bounced, we need to remember that each rebound consumed a portion of the available pool of buyers.  After a certain point we run short of new buyers and the market falls under its own weight regardless of positive headlines or outlook.

While we know what is coming, the far more difficult part is timing the trade.  Every rally tops and this one will be no different.  All the bears calling for a pullback since January 2nd will eventually be proven right, but that is little consolation to their portfolio that was decimated by the premature call.  Markets go up and they go down, everyone know that.  All the money is made in figuring out when.

This rally is beyond obvious when mainstream media is promoting all-time highs in the Dow and S&P.  Many perma-bears are coming around because no one want to hear stories of doom-and-gloom anymore.  While I count myself as an optimist and a firm believer in the resilience of our economy, markets moves in waves.  The overshoot to the upside and downside every time, always have and always will.  The savvy trader exploits these swings in sentiment.  Last November saw a wave of pessimism hit the markets and lead to an oversold condition as traders bailed out for no other reason than everyone else was selling.  This herd mentality skews moves to the upside too.  When the crowd is calm and complacent, we let down our guard too.  The ironic thing is the market is safest when people are most scared and riskiest when everyone is most comfortable.

TRADING OPPORTUNITIES

Expected Outcome:
I wish I had a crystal ball and knew for sure if this dip was buyable or the start of something larger, but the best I can do is trade probabilities   Its been a good run, the mass media is promoting all-time highs, we just started a new quarter, and fear of an economic collapse has been replaced with fear of missing the rally.  All these conditions point to a market closer to the end than one that still has room to run.

There is a lot of positive news already built into the market and simply meeting expectations is not going to move us higher.  On the other hand anything that falls short will catch investors off guard and rekindle those pessimistic and irrational fears.  There is no reason this market cannot bounce back today, but a second consecutive down-day and close under 1548 will rain on this parade.

Alternate Outcome:
The last few weeks of sideways trade facilitated profit taking and gave nervous holders the opportunity to bail out.  Wednesday’s high volume selloff also cleared dead wood and tempted bears to short this market.  These sellers are creating fuel for the next rally leg.  Holding above 1550 and reclaiming 1560 by Friday shows buyers are still supporting this market and the next move is higher.  No matter what the daily price-action shows, the rally remains intact until we start making lower-lows and lower-highs.

INDIVIDUAL STOCKS

AAPL fell back into the $420s and any hope of resuming the previous rebound is fading fast.  We are within $10 of setting a new low and expect a wave of selling to hit the stock if it falls to this level as stop-losses and shorts are triggered by this widely followed technical level.  Eventually AAPL will boost its dividend and buyback, upgrade existing products, and launch new products, the question is if these will be enough to bring a lethargic stock back to life.  Once a stock loses its aura of invincibility, it is really hard to get it back.  The tech industry is littered former pioneers and innovator who continue operating great companies, but their stocks have been dead money for years. Is AAPL on the verge of joining that club?

NFLX is struggling since it broke the 50dma yesterday.  This stock is vulnerable to broad market weakness and is a poor place to hide out if anyone expects a near-term selloff.

Stay safe

PM: Is this the start of something bigger?

By Jani Ziedins | End of Day Analysis

PM Update

Stocks rattled nervers as they slid hard on elevated volume.  Will this one bounce back tomorrow like all the others?  AAPL still has a way to go before the hopeful give up on the stock.

MARKET BEHAVIOR

Stocks crashed through 1560 and closed at 1553.  The most notable development was the strong volume, the highest since mid-March.  An interesting fact is the last time we had above average volume was the final day of a three-day selloff.    Today was the eleventh consecutive day of alternating gains and losses; will a rebound tomorrow make it twelve in a row?

MARKET SENTIMENT

Clearly today’s dip got people’s attention and this was the most enthusiastic trade we’ve seen in a while.  The market rose to 1571 in the first few minutes, but it was all downhill from there.  No doubt today’s weakness triggered automatic stop-losses just under support at 1560 and the relentless slide through the day flushed out weak holders with itchy trigger fingers.  Capitulation bottoms typically occur on large volume after a prolonged decline when stubborn holders can no longer endure the pain any longer.  This happens after prolonged drop where doubt creeps in and consumes formerly confident traders.  Today’s one-day selloff is simply not enough to rattle the nerves of resolute holders.  Without a doubt we could rebound tomorrow, but it will not be a capitulation bottom and enjoy the same clear sailing seen after a more thorough purge of holders.

TRADING OPPORTUNITIES

Expected Outcome:
The question on everyone’s mind is if this is just another dip on the way higher, or the start of something bigger.  Any weakness over the last 4.5 months was a savvy buy, but will we say the same thing about this dip a month from now?

I cannot say if this is the top, but I know the risk/reward shifted in recent weeks and owing stocks here is more risky than at any other point in the rally.  We could easily see the market bounce tomorrow, but just because the market goes higher doesn’t make it a good trade.  This rally leg will top and pullback at some point because it happens to every bull move; two-steps forward, one-step back.  The signs are pointing to this pullback happening sooner rather than later, but I cannot predict exactly when, no one can.  During periods like this, I would rather be out of the market wishing I was in, than in the market wishing I was out.  I don’t mind missing another 10 or 20-points of upside if it means I avoid the risk of a 75-point selloff.

The market failed to hold 1560 today and leaves the door open to further selling.  Falling under 1548 will trigger an avalanche of automatic stop-losses as the rally makes its first lower-low.  Without a doubt this weakness will rattle the nerves of previously confident, complacent, and greedy holders, leading to even more selling.  But we have to break 1548 first.

Alternate Outcome:
A rebound on Thursday shows buyers are still able to support this market.  A close above 1560 Thursday and holding this level Friday likely mean the next move is higher and we will finally break all-time high.  Anything less and it shows this market is running out of buyers.  The big catalyst is Friday’s employment numbers.  An unexpectedly bullish number could stop this selloff in its tracks.

INDIVIDUAL STOCKS

AAPL finished up half a percent, but well off of earlier highs.  This cycle of raising hopes and dashing them is the demoralizing process that is required before this stock will truly bottom.  There are too many holders waiting for the expected rebound.  There are others that have ridden it down this far who keep holding because they figure it cannot go any further.  Only after these groups have given up on AAPL and sold out will the stock finally end the slide. What happens after that is up for debate.  Former market leaders and bellwethers like MSFT and CSCO are still well off of their all-time highs.  Often what is one market cycle’s must have stock becomes the next’s washed-up has-been.

Recent weakness deflated the sails of hot stocks like NFLX, AMZN, and LNKD.  These high flyers often feel the effects of market moves two and three times.  A modest dip in the indexes cold trigger a 10% correction in these popular momentum stock.   Everyone likes to play stock-picker, but the broad market is responsible for at least 50% of a stock’s move.  Know what the market is doing and we have a significant edge.

Stay safe

AM: More volatility

By Jani Ziedins | Intraday Analysis

AM Update

Stocks are keeping the up and down routine going as we are selling off following yesterday’s new highs.  Is this just another buyable dip or the start of something more?  AAPL attempts another rebound, completely oblivious to the market weakness around it.

MARKET BEHAVIOR

Stocks dipped on weaker than expected private employment.  This pushed the marked through recent support at 1560 by late morning. If today’s declines hold through the close, this will be the eleventh consecutive alternating red and green day.  At some point this market will string together two up or down days and that could signal the next near-term move, either a breakout or breakdown.

MARKET SENTIMENT

The jobs data was decent, but fell short of expectations and given how much positive news has already been priced in, the market sold off.  It’s easy for a repressed market to top expectation and trigger a wave of buying, but inflated markets are far more vulnerable to disappointment because everyone bought the market ahead of time.

One concern about this market is the wedging higher.  This sucks in buyers and does not refresh the market by forcing out weak hands.  Dips refresh the market because it sends uncommitted holders running for cover, creating the a new pool of buyers to fuel the next leg higher.  But wedging lets these weak holders hold and actually increases the vulnerability of the market because it encourages even more weak holders to join the party.  Once the level of weak holders reaches critical mass, the market collapses in a rush of panicked selling.  Currently the market is down nearly 15-points and it feels like some of this froth is letting out.

TRADING OPPORTUNITIES

Expected Outcome:
Is today’s weakness just another buyable dip, or the start of something larger?  While I cannot say for sure what will happen next, I am concerned about the sustainability of the Q1 rally and think this is a normal and healthy time for the markets to rest a bit.  A day-trader can play these intraday swings, but there is too little upside left in this move to make it worthwhile for me.

Failing to hold support at 1560 is a concern, as would be a second day of selling on Thursday.  Any weakness is setting up for a buyable dip, we just don’t know if it will bounce off of 1560, 1550, 1500, or 1400.  Given how many shallow, buyable dips we’ve seen recently, I’m wondering how much money the dip-buying crowd has left.  Without dip-buyers and triggering stop-losses at technical support levels will  lead to a larger wave of selling than we’ve seen recently.

Alternate Outcome:
Record highs has all the worrywarts and naysayers out in force.  Many traders are anticipating this top and selling into the strength.  These seller will be the new buyers when the market heads higher.  Today’s weakness is an important turning point for the market.  It makes an interesting shorting opportunity, but if the market rebounds, it shows bears still cannot get the job done and the next move is higher.

INDIVIDUAL STOCKS

AAPL is attempting another rebound and while the stock is in the green, it’s off early highs.  This stock is in a world of its own and is up on a day where the rest of the market is off.  The iPhone has its own ecosystem and so does AAPL’s stock.  AAPL traders are oblivious to the world around them, showing they don’t care about macro fundamentals.  And given the disconnect from AAPL’s earnings data, micro data doesn’t matter either.  What are we left with?  Gamblers.  At this stage traders are just gambling in the stock.  When a stock is completely detached from macro and micro data, fundamentals don’t matter and anyone who is using these to justify their purchase is going to have a bad time.  This is an emotion driven trade and it can only be traded successfully when evaluated from a sentiment analysis.

And for all those “long-term investors” out there who are buying last decades big winner because they know it will come back, I only have one question for you, how many technology market leaders had strong runs 10-years after their initial breakout?  Most tech companies don’t even stay relevant for twenty years, let alone have a runaway stock.  MSFT, CSCO and DELL had great, decade-long runs but have been dead money ever since, even thought the companies are doing great.  Of course AAPL is different from those just like all those were different from the ones that came before them.  The names change, but investor attitudes stay the same.

Stay safe

PM: Hold ’em or Fold ’em?

By Jani Ziedins | End of Day Analysis

PM Update

Another new high as this rally just doesn’t know when to quit.  AAPL on the other hand cannot figure it out and gave back all of its early gains.

MARKET BEHAVIOR

Stocks rebounded from Monday’s selling and set new intraday and closing highs.  Market traded as high as 1573 before giving up a portion of those gains in afternoon trade.  Volume was below average, but the highest in a couple of weeks.  The all-time intraday high is the only old record left standing and sits less than six-points away.  If the market ends in the green on Wednesday, it will be the first back-to-back up days since March 14th.

MARKET SENTIMENT

The whipsaw grind higher on low-volume continues.  Through this sideways trade, buyers are buying and sellers are selling, but more important, who is selling and who is buying?  Is smart money locking-in profits by selling to dumb money?  Or is impatient, dumb money getting nervous and selling to smart, patient money?

Without a doubt we’ve seen profit-taking at these all-time highs as many traders anticipate near-term weakness, but so far that selling has been matched and even exceeded by the appetite for stocks.  Every dip has been a buying opportunity and this pattern clearly lasted longer than I expected.  The thing I need to figure out is if I am just early, or if I am completely wrong.  There are many reasons for the market to pullback here, but the only indicator that matters, price, continues inching higher.

For market to continue higher, we need to find new buyers.  These could be premature sellers coming back into the market.  It could be remaining holdouts still watching this rally from the outside.  It could also be reallocation.  As Greg pointed out in the AM post’s comments, small-caps did not enjoy the SPX’s strength.  Are traders selling smaller stocks and rolling that money into safer blue-chips?  Is the market seeing inflows from the bond market as retail investors are chasing all-time high headlines?  If the rally continues, it will be on the back of one or more of these themes.

TRADING OPPORTUNITIES

Expected Outcome:
The market is holding up and we have to respect that.  Another close above support on Wednesday will show there are still more willing buyers than sellers and we should expect the next move to be higher.  That doesn’t make the market an automatic  buy because we have to consider the unfavorable risk/reward at these elevated levels, but it will certainly indicate shorting the market is premature.

Failing to hold 1560 on Wednesday is a bigger deal and shows bulls struggling to find new buyers at these record levels.  The market will return to normal volume in the near future and if buying cannot keep up with selling, that will finally be the start of the long-awaited pullback.

Alternate Outcome:
The market marches higher no matter what the headline or how compelling the bear case is.  This rally outlasted countless pessimistic predictions and there is nothing to say it cannot continue humiliating the next wave of top-pickers.  A slowly improving economy will continue convincing investors light on equities to wade in.  Buying by these late-to-the-party buyers is what will keep this rally going.

INDIVIDUAL STOCKS

AAPL turned a nice bounce into another warning flag as the stock reversed from early gains and finished near flat.  This is a stock where everyone is trying to will it higher on hope and hype, but no one outside of the cult is buying it.  Valuation doesn’t matter, cash hoard is meaningless, and history of innovation is discounted.  No matter what the believers point to, the larger investing world remains skeptical and the stock continues its slide as the faithful start giving up.  When a stock has everything going for it, but still cannot get out of its own way, that is a bad situation to get involved in.  Will AAPL recover its innovation leadership position, or is this the ’80s all over again where AAPL will make a fantastic niche product with 3% market share, like the Mac at the turn of the century?

Stay safe

AM: New highs

By Jani Ziedins | Intraday Analysis

AM Update

MARKET BEHAVIOR

Stock’s indecision continues as we rebound from yesterday’s weakness and are making new highs, just a few points shy of the all-time record at 1576.

MARKET SENTIMENT

This back-and-forth has both bears and bulls more vocal as they cheer for their side, but this equality is new and a big reason the market’s behavior has changed in recent weeks.  Bulls are still winning the tug-of-war with each new high, but the rate of gains has tapered from the nearly straight-up market in the first two-months of the year.  This is typical behavior as the best gains occur early in a move and become harder to come by the older a rally gets.  At 4.5 months old, it shouldn’t surprise anyone we are seeing more sideways trade.

The Q1 rally proves traders were overly bearish at the start of the year, and converting former bears into buyers is what propelled us higher.  If this rally fueled itself on pessimism, how much gas is left in the tank?

It is easy to predict the future, the harder part is getting the timing right.  Both bulls and bears could be right if we continue another 30-points higher before falling into a 10% correction, but they could both lose money if the bear shorts too early and the bull holds too long.  That is what makes this game so maddeningly difficult.  I have no doubt this market will top because every rally eventually ends, the harder part is figuring out when.

TRADING OPPORTUNITIES

Expected Outcome:
There are three ways this market will top.  It might simply run out of buyers and rollover.  It can surge higher and exhaust itself before reversing.  Or an unexpected negative headline can send holders rushing for the exits.  Holding 1560 through Wednesday makes the rollover top unlikely because we don’t get that long to sell the top.  We still haven’t seen a powerful exhaustion surge, so the market needs to go higher before it can turn lower under that scenario   And the news driven top requires an external and unpredictable catalyst to move the market.

In the absence of bad news, the market is setting up for higher prices if we hold 1560 through Wednesday.  Just because the market is headed higher over the next few days doesn’t automatically make buying and owning the market a good idea.  We always need to consider the risk/reward of every position and given the age of this rally and the slowing gains, it seems like there is more downside risk than upside potential here.  And of course a material selloff under 1560 today or tomorrow means this market is struggling to find buyers and we need to watch for further weakness.

Alternate Outcome:
A lot of profit taking occurred over the last 4-weeks of sideways trade.  We need buyers to continue higher and these recent sellers could buy back in and keep pushing this market higher.  The longer we hold these levels, the more likely this outcome becomes, especially if we consolidation stretches out and gives the 50 and 200dma time to catch up.

INDIVIDUAL STOCKS

AAPL recovered a large chunk of yesterday’s selloff.  This could simply be a dead-cat bounce as shorts cover for a tidy profits after the recent selloff.  Buying at $430 is less convincing when the stock couldn’t attract support above the 50dma.  Anyone who wanted to buy the dip already bought it, meaning there are few buyers waiting in the wings to prop this name up.  Look for more weakness as hopeful bulls sour on this name.  I don’t see a rebound in this name until everyone has given up on it and stops defending it.

Stay safe

PM: What comes next?

By Jani Ziedins | End of Day Analysis

PM Update

Markets tested support at 1550 and AAPL had its worst day since the post-earnings plunge.

MARKET BEHAVIOR

The up-down pattern continued with Monday’s selloff on the heels of Thursday’s record close.  This was the ninth consecutive day of alternating red and green.  Volume was well below average as traders continue their indifference toward this market.

MARKET SENTIMENT

Buyers are not clamoring for the breakout and holders not are rushing for the exits on weakness as this low-volume trend continues into the 4th week.  This can be both bullish and bearish depending on which side is the first to return in force.  Holders continue holding for larger gains and few are locking in profits at these levels, keeping supply tight.  One the other side buyers are restrained, either because they still don’t believe in this rally or alternately everyone already bought in and there are few left to buy.

The big difference is no one needs to buy, but there will always be sellers.  There is only one reason to buy, to make money either through capital appreciation or dividends.  If traders do not think a stock will go up, there is no reason to buy it.  But selling is a different animal and there are many reasons people sell stocks.  The obvious is they think it will go down, but people also sell to pay living expenses or a pension fund’s distributions to pensioners.  Money managers also sell things that go up a lot and skew their original allocations.  In the latter situations, a money manager can still be bullish on a stock or the market, but they need to sell for other reasons.  This dynamic is why a market needs a catalyst to go up, but will fall under its own weight in the absence of a reason to buy.

TRADING OPPORTUNITIES

Expected Outcome:
Even with the wind at its back, this is a challenging market to own.  Given how far we came over the last 4.5 months, it is hard to project more big gains before a normal and healthy pullback.  We can debate if the pullback will be 5% or will cascade into a 20% bear market, but either way we have at least 75-points of risk (5%).  Some of the more optimistic projections call for a continued rise to 1600 before topping.  That gives 75-points of risk for 38-points of upside.  It is hard to get excited about that trade even before we factor probabilities into the equation.  If we wouldn’t buy the market here, we shouldn’t own it either.

Alternate Outcome:
Momentum is clearly higher.  It is far more profitable to bet on a continuation than a reversal because a market continues countless times, but reverses only once.  Holding support at 1560 through Wednesday, or 1550 through Friday shows buyers are standing behind this market and it is not in imminent danger of imploding.  There is little risk to this rally as long as it holds 1550 and we don’t establish a lower-low until we fall under 1538.  While I am cautious of this market, I am keeping an open mind that this rally still has legs

INDIVIDUAL STOCKS

AAPL was hammered and finished at the lows of the day.  The 3% loss was the worst showing since 12% earnings plunge.  Volume was below average and failed to signal a high-volume capitulation bottom, meaning more weakness is likely.  The stock is within $10 of a new low and if it cannot hold recent support, look for a dip to the $400 level.  The fate of this move likely rests in the quarterly earnings in a few weeks.  This is purely anecdotal on my part, but I’m always on the lookout to see what phones people are using.  I see lots of iPhone4 and 4s, but very few iPhone5.  The other tidbit is few people are curious about my iPhone5 and I’ve only had two people comment about it since I got it on the day it came out.  Again this is purely anecdotal evidence, but it seems unlikely they will report blowout iPhone5 sales numbers based on how few I see in the wild.  Given the widespread bullishness still surrounding this stock, it sure feels like the risk remains to the downside.

Stay safe

AM: Taking a break

By Jani Ziedins | Intraday Analysis

AM Update

Stocks opened weak in what looks like another buying opportunity, or is it?  AAPL’s struggles continue .  What will it take to turn the stock around?

MARKET BEHAVIOR

Stocks are down half-a-percent on the first day of the second quarter.  They found early support at 1560 and are trading sideways through late morning trade.

MARKET SENTIMENT

Is this just another routine dip on the way higher?  In a rally, far more dips are buyable because they all bounce until the one that doesn’t.  We could see twenty buyable dips before coming to the one that doesn’t bounce.  I’m just making up numbers here, but without additional information, it is far smarter to buy a dip because 95% of the time it will bounce.  This shows why picking tops is often a fools game because tops happen so infrequently.  But that is in the absence of other information.  The last few months has seen countless buying opportunities, but each one brings us one step closer to the end.    If we had eighteen consecutive rebounds, then the odds of a top become far more likely, going from 5% to 50% in the hypothetical example.  When combined with the limited upside and material downside after a large move, buying the dip becomes a poor trade, even if it does bounce.  Success in the markets isn’t about predicting the future, but understanding probabilities and weighing that against risk versus reward.

Taking a deeper look at both sides of the argument here.

Bull Case:  The momentum is clearly higher and the trend of higher-highs and higher-lows remains intact.  The economy continues improving; the pace is slower than anyone wants, but the direction remains positive. Corporate earnings and balance sheets are as strong as they’ve ever been and valuations are far more reasonable than the two previous times we traded these levels.

Bear Case:  Every rally comes to an end and this one is 4.5 months old.  Further the market’s personality often changes with each new quarter.  A lot of optimism is already priced in the market as sentiment shifted from paranoid pessimism in January and February to near complacency because everyone expects Uncle Ben will take care of us.

These arguments are equally compelling and is why both sides have passionate supporters.  But this is always the case.  If the answer was obvious, market participants would make the easy trade and buy/sell stocks until the price changed enough to bring opposing views back in balance.  The legitimacy of both points of view is what makes it so difficult to trade the market.

TRADING OPPORTUNITIES

Expected Outcome:
While the trend is higher, we don’t need to hold out for those last few dollars of upside.  Its been a good run and everyone know this cannot go on forever.  It is often better to get out while everyone else is oblivious to the risks because it gets ugly when everyone rushes for the exits at the same time.  I don’t know which dip will not bounce, but I know it gets closer by the day.

Alternate Outcome:
A dip to support at 1560 is hardly a breakdown and simply resting after setting a new closing high last week.  At this point the market needs to fall past 1538 to start a new trend of lower-lows and that is still twenty-points away.  Momentum is clearly higher and continued support at 1560 shows buyers are still willing and able to step in at these levels.  The pullback case rests on running out of buyers and as long as we have buyers, we will continue higher.

INDIVIDUAL STOCKS

AAPL is having another ugly day and this is the fourth consecutive down-day.  The stock fell $35 from the recent break above the 50dam.  Obviously the stock was unable to attract wider follow-on buying after clearing this technical milestone and the stock collapsed after the “choir” ran out of money buying the dip.   The question any AAPL bull needs to ask is who is the next buyer?  All the faithful already own as much as they can hold and the wider market doesn’t seem interested in the outstanding valuation, margins, cash hoard, or history of innovation.  If AAPL cannot find buyers at a forward P/E of 8 ex-cash, is falling to 7 really going to make everyone wake up and rush to buy the stock?  AAPL might make great products, but the stock is clearly broken and the trend of lower-lows remains intact until it can attract new buyers.

Stay safe