PM: Getting frothy

By Jani Ziedins | End of Day Analysis

Apr 11
S&P500 daily at end of day

S&P500 daily at end of day

PM Update
Markets added to their weekly gains as we push toward 1600.  Is this move sustainable or on the verge of exhaustion?

MARKET BEHAVIOR
Stocks added to yesterday’s breakout and are just a few points shy of 1600.  Thursday’s volume was near average and shows traders are re-engaging this market after several weeks of anemic trade.

Wednesday’s breakout finally moved the market above the month-long trading range and shows it is ready something new.  While we are moving higher, be cautious of a failed breakout and retreat back into the trading range.  Sometimes markets are direct, other times they fake us out before revealing their true intentions.  Things look good for the rally as long as we continue holding above previous resistance at 1570.

MARKET SENTIMENT
For as many things as people are worried about, you wouldn’t know it by looking at stock charts.  This market is running to all-time highs and humiliating any and all naysayers in the process.

Markets require demand to go higher.  Without new buying they fall under their own weight no matter how confident holders are.  People sell stocks for many reasons, but they only buy for one, because they predict it will go up.  So far people continue buying this market even at these seemingly extended levels.  While I expected the market was topping, we always knew the alternative was a continuation higher.  The month-long consolidation and flirtation with all-time highs convinced many holders to lock-in profits and wait for the next trade.   These are many of the traders chasing the market higher.  We all know this will come to an end at some point, we just are not there yet.

One of the topping signs we are looking for is the biggest weekly gain after an extended run.  This is the classic exhaustion top.  Through the first four-days of the week we are already up 2.6%, the largest weekly gain since the New Year’s Fiscal Cliff pop.  Another up-day on Friday will extend this even further.  While it is hard to argue with the market, history is not kind to moves like this and it is hard to chase the market here.

TRADING OPPORTUNITIES

Expected Outcome:
Clearly the trend is higher and we cannot get in the way of this bear meat grinder,  but that doesn’t mean we have to embrace this rally.  Sometimes the best trade is doing nothing.  Shorting this market is suicidal.  Holding this extended rally reeks of greed.  The only thing left is sitting in cash and waiting for the next high-probability trade.

Alternate Outcome:
There is a lot of fear of heights in this market and that is why we continue higher.  For as giddy as the chart looks, there are still new buyers willing to buy this market.  No matter what anyone says, as long as buyers keep showing up, the market will continue rallying.

INDIVIDUAL STOCKS
AAPL traded sideways after Wednesday’s nice gains.  We are less than two-weeks from earnings and expect some fireworks as either bulls or bears will be sent running for cover.  If someone wants to trade this, consider limiting risk by using call or put spreads.

NFLX finished at the highs of the day as the bounce off of $160 is sticking.  Hopefully bears locked in their short profits because this is headed higher as long as the market holds up.

AMZN daily at end of day

AMZN daily at end of day

AMZN smashed through the 50dma…….again.  Will this be the time it holds?  Like everything else this time of year, it all comes down to earnings.  A strong number will squeeze shorts and send the stock higher for a few days, but a miss could be far more damaging given how high the expectations are.  This is also a good candidate for an option trade.  One could also wait for earnings and jump on the surge or crash, whichever it happens to be.

LNKD is running into resistance at $180.  Clearly the stock wants to go higher and look for a short squeeze when it breaks this level.  But like all of these speculative stocks, all bets are off if the market starts melting down.  Hiding out in these stocks during a correction is like seeking safety in a tree house during a tornado.

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.