PM: Bizarro world

By Jani Ziedins | End of Day Analysis

Apr 09
S&P500 daily at end of day

S&P500 daily at end of day

PM Update
The market surged after Friday’s weak employment and MSFT and INTC are leading us higher in this bizarro world scenario.  Who expected this?

MARKET BEHAVIOR
Stocks finally did it, they strung together two consecutive up-days for the first time in over three-weeks.  We surged nearly 30-points since Friday’s opening low, an impressive rebound from the post-employment weakness.  Volume was still below average, but higher than Monday’s exceptionally low turnover.

MARKET SENTIMENT
The market is proving it is an equal opportunity humiliator.  This sideways trade is grinding up both bulls and bears.  Currently bulls have the upper hand, but that’s only if we breakout to new highs.  The way this thing is going, it wouldn’t surprise me to see another plunge after setting a new high Wednesday.

It really feels like the market is stuck in no-man’s land.  Bulls promote the trend and unlimited monetary easing.  Bears say this has gone far enough and we’re due for a pullback.  Both have equally compelling arguments and why the market’s stuck in this trading range.

TRADING OPPORTUNITIES

Expected Outcome:
At this point it is just too difficult to predict the next move.  I expected market weakness, but it just hasn’t happened.  When markets breakdown, they typically roll over fairly quickly.  The resilience shows it is simply not ready yet.  Support and a strong close on Wednesday demonstrates this market has more upside left.  I don’t know if that is ten-points or fifty, we just have to wait and see.  Of course I don’t trust this market, so even if the next move is higher, I don’t have to be part of it.

If the trading range remains intact and we trade lower on Wednesday, the chances for a near-term pullback increases.  We bounced off 1540 two times already and a third test will not be as lucky.  This is a widely followed technical level and expect a large wave of stop-loss and short selling to hit the market if we penetrate these recent lows.

Alternate Outcome:
This rally might only be middle-aged and the recent volatility and skepticism are keeping it younger than most expect.  Challenging all-time highs brought out the cynics and recent dips revitalized the bears.  The rally feeds on this negativity and is why we continue holding up.

The last three-days of nearly straight up gains are stereotypical short-squeeze.  There was little news to justify the buying and in fact the news on Friday was unexpectedly bearish.  Yet here we are, near all-time highs.  I cannot tell if this is the last gasps of the rally or we are just getting started.  Either way, this is a tough place to short the market.

MSFT daily at end of day

MSFT daily at end of day

INDIVIDUAL STOCKS
Much of the market’s strength came from old tech.  MSFT and INTC had huge days for such boring names.  It appears rumors of Wintel’s death are greatly exaggerated.

AAPL is still stuck near the lows, but found a little more breathing room.  From a sentiment standpoint, it is interesting to note how the message volume on StockTwits AAPL feed has dropped dramatically.   Maybe people are finally losing interest in this name indicating we are getting closer to the expected rebound.

The big hurdle will be earnings in two-weeks.  This is just anecdotal, but personally I have seen very few iPhone5s in the wild.  I fly a fair bit and will always look to see what personal technology people  using at the airport and on the plane.  There are tons of iPhone4s and Galaxy S3s, but few iPhone5s.  I’m afraid to think what would happen if AAPL actually reported a drop in sales.  There is nothing that will kill a growth story like a lack of growth.  Of course that could be the last plunge before the stock finally rebounds.

NFLX found support at $160 after a bout of selling, but its fate largely lies with the broad market.  If the market continues higher, look for NFLX to follow suit, but if the market breaks down, it will take high-beta stocks like NFLX down with it.  But this dip will be a buying opportunity and the stock’s race higher will continue once the market regains its footing.

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.

LT April 10, 2013

Great article as usual. My question is how much of this market is really being traded by retail investors vs how much is government intervention propping the market. The market no longer makes sense and its harder and harder to to profit from it. We really need a pullback so people can pile back in again. At this level only a foot would buy but than the government has more money than anyone else on here or WS especially when you can make money out of thin air. I dont expect a pullback until next month. But the more and more news for a pullback it wont happen. The govenrment wont allow it. Bernake wont allow. Tell me if Im wrong here.

    Jani Ziedins April 10, 2013

    The best Bernanke can do personally is attempt to manipulate interest rates by printing money and buying US Treasuries with it. The only reason it’s been successful is because the market has been a willing accomplice. The market is so much larger than the fed and it can easily overwhelm his buying if they feared inflation and started dumping Treasuries.

    Bernanke is only indirectly influencing the equity markets by making Treasuries and other fixed income investment yields so pathetic that investors are forced to look elsewhere. And more than anything he is affecting perception in a world where perception is reality. If people feel safe because of Fed buying, then they will buy equities and hold them, causing the market to go higher. If the market sours on Bernanke, things would turn around real quick and there is nothing he could do about it. This happened in countless other countries before and could happen here. The unique situation in the US is its safe haven status. It’s not that the US is a great place to invest, just that everywhere is so much worse. If there was a viable alternative, we would not be able to pull this off. But where else are people going to go? Europe? They can’t go to China. Canada and Australia are too small. Japan is in a world of hurt. Until one of these other areas get their act together, there will be little consequence to what Bernanke is doing.

spearchew April 10, 2013

“My question is how much of this market is really being traded by retail investors vs how much is government intervention propping the market.”

http://s10.postimg.org/88v5l6hdj/COT_report.png

Most definitive answer I think you will get – I took this from the CFTC Commitment of Traders report.***

Shows the proportion of each class of investor in E-Mini Futures.
Retailers… consistently around 10% of the volume
“Commercial Hedgers”… consistently around 75%
Non-Commericals / Large speculators… consistently around 15% but recently a sharp increase.

Your query about how much trading is down to government intervention – forgive my ignorance – but does the US Gov or Fed ever actually directly/covertly trade the markets… or do they simply get everyone else buying by threatening to print more money?
(Either way, end effect is the same I guess… market goes up. But as a retailer I feel equally compelled to buy because when Bernanke is bullish, just as the largest trader at the largest mutual fund is).

“I dont expect a pullback until next month. But the more and more news for a pullback it wont happen. The govenrment wont allow it. Bernake wont allow. Tell me if Im wrong here.”

I similarly feel that the market is due a significant pull-back in Q2, just as happened in 2012. It does not seem natural to me for the market to rise so persistently when the fundamentals are pretty poor.

That said… via Jesse Livermore: “I think it was a long step forward in my trading education when I realized at last that when old Mr. Partridge kept on telling the other customers, “Well, you know this is a bull market!”

***
The number of contracts shown in my charts here are the Longs.
I could have shown Shorts and the picture would have been practically the same, since Total Longs = Total Shorts.

Brad April 10, 2013

I love your article Jani – I have the thought and you seem to write it down or write it within a day or two. I was thinking earlier (end of March) that we would double bottom, then move up. Now that we seemingly have double bottom (last Friday being the second bottom) and with the decline into earnings, I expect more upside movement, but I too am leary of this market and I’m trading it small (30% in equitites, 70% gov bonds [gov bonds is as close to cash I can get in my 401k]). I think we will top towards the end of April and we will see where we go from there. I’m hesitant to say we will have a pullback next month because the pullback seems more anticipated than Christmas, but with Christmas we have an actual date. We could go sideways to ease off the overbought conditions if they present themselves by the next top, but it is too soon to speculate. I’m looking day to day at price moves and trying to keep away from too much noise – but ti does feel “toppy” up here, but like you say, we couild be only middleaged in this rally and it could go another 50+ points on the SP500. Price action will lead the way in my view.

    Jani Ziedins April 10, 2013

    That’s what it looks like. The one thing about long and slow tops is they lead to bigger selloffs. Fast selloffs scare the market and find a capitulation bottom quickly, it is the slow grind that leads to far more damaging bear markets. We’re not there yet, but the longer this drags out, the more at risk the 4-year rally becomes. Pausing and refreshing is good, long unchecked runs not so much.

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