PM: How high is too high

By Jani Ziedins | End of Day Analysis

Apr 30
S&P500 daily at end of day

S&P500 daily at end of day

PM Update

MARKET BEHAVIOR
New all-time highs as the market rebounded from an early selloff.  Buyers keep buying this market and there is clearly no problem with demand.  Today’s record was set on elevated volume, showing plenty of strength left in this bull.

MARKET SENTIMENT
The cynics were dealt another defeat.  They will be right at some point, but timing is everything and they remain on the wrong side of the trade.

Tomorrow is the first day of May and we get to hear everyone promote “Sell in May….”.  There are two views on this, those that fear summer weakness and already sold, and those that don’t care and are still holding.  At this point Sell in May has already been factored into the market is a non-issue.  We could selloff for any number of reasons, but Sell in May is not one of them.  If anything this is slightly bullish because recent sellers become potential buyers as the rally continues.

Traders remain wary of this market and with plenty of good reasons, but the market is not listening.  Since we make and lose money by the market’s moves, that is what we need to give the greatest weight to.  At the same time we cannot lose sight of what others are saying because they could eventually be right.  We are four-years into this bull market and it is fairly old for a bull.  Currently we are living on easy money complacency.  The real shock will come on the first hints of withdrawing monetary stimulus.  We are still a ways from the Fed increasing interest rates, but the a whiff of winding down bond buying will send people running for cover.  If the economy continues making progress, we could reach levels where the Fed feels comfortable pulling back, but like any junky, the market is going to suffer from painful withdrawals.  While the economy might be stable, we could fall into bear market.

TRADING OPPORTUNITIES
Expected Outcome:

Keep doing what is working.  The market is on the verge of hitting 1600 for the first time in history and buyers continue showing up in sufficient numbers to hold us at these levels.  The more people fear this market, the more comfortable I am.  We need to take this day-by-day, but the likely outcome is a strong summer with weakness getting pushed back to the fall.  We could see a 3-5% pullback at any point, but the larger correction is still months away.

Alternate Outcome:
There is a lot of air under the market and anything could trigger a stampede selloff.  Price action remains bullish, but we need to watch for cracks in the foundation.  As small traders we have the advantage of speed.  Use trailing stops to ride the market higher while guarding against the eventual breakdown.

Trading Plan:
The market likes round numbers and 1600 is just a couple of points away.  We might see a little selling after brokers pass out the 1600 hats, but as long as we hold 1570 everything is fine.  Investors looking to get in this market don’t let much weakness develop before jumping on discounted shares.  Slipping under 1570 means buyers are no longer enthusiastic and more cautious, likely leading to a test of the 50dma.  Failing to hold 1540 means we ran out of buyers willing to buy these levels and we need to fall further before value investors will step in.

INDIVIDUAL STOCKS
AAPL had a strong debt offering as part of its plan to return cash to shareholders.  It is nice to see the company sharing the wealth with shareholders, but it is too bad it cannot find something more innovative and exciting to do with its profits.  We can continue higher on a relief rally, but it is hard to get excited about an iPhone5s and we should expect AAPL to fall further behind Samsung this year.  It is also likely the Galaxy S4 will outsell the iPhone5s as few iPhone4s users feel compelled to spend the money upgrading.  PCs have a 4-year refresh cycle and as smart phone capabilities plateau, expect a similar shift to less frequent upgrades.  But what is bad for AAPL is good for ATT and VZ.

AMZN recovered the 200dma as dip buyers rescued the stock.  Was the selling overdone or just getting started? The rebound can continue for a couple more days, but another test and violation of the 200dma shows a lack of conviction from buyers and more selling is likely.  But a note for shorts, this is a trading stock and AMZN is not going out of business anytime soon.  Don’t get greedy and take profits near $220.  For longs, it is hard to get excited about this bounce until it reclaims the 50dma.

TSLA daily at end of day

TSLA daily at end of day

I had a reader request to look at TSLA.  I hadn’t pulled up the chart in a while and boy did I miss an impressive move.  It is hard to be anything but cautious after such a strong run.  Today’s huge volume reversal is also an obvious concern.  Anyone lucky enough to ride this higher should consider locking in some, if not all of their profits.  There could be more to this move, but obviously the rate of gains cannot continue at this pace.  A bull could buy back in after finding support at $45.  As for shorting this stock, it is tough to get in front of such a strong move, but if someone is feeling lucky, short with a stop at $55 or $58 and take profits at $45.  Since this is such a volatile stock, manage risk by trading a smaller than normal position.

While I cannot review all the stocks people request, I’ll try to incorporate reader request in future posts, so keep leaving suggestions in the comments.

Plan your trade; trade your plan

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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.

Peto1 April 30, 2013

” …it is too bad it cannot find something more innovative and exciting to do with its profits.”

O ye of little faith: Did you not hear Tim Cook say Apple would be introducing “exciting new product categories” starting this fall and during all of 2014? With over $145 billion in cash Apple has more than enough to both share its profits with its shareholders and invest them in developing great new products. If you can weather the dearth over the next 3 to 6 monthes – though I’m guessing things will begin to get interesting in mid-June at the WWDC keynote – your patience will be handsomely rewarded …

    Jani Ziedins May 1, 2013

    I hope so, I’m a fan and user of Apple products and their current lineup is growing tired, especially iOS. They need to come up with something new and exciting, a marginally refreshed iPhone is not going to cut it. The last big thing they came up with were Apple Maps and a smaller iPad. Remember how groundbreaking those were? Me neither. They need real innovation to convince existing customers to upgrade and former customers to comeback. AAPL has a lock on the rich, white, soccer mom, but they are losing the cool factor with the young and tech savvy.

Peto1 May 1, 2013

“AAPL has a lock on the rich, white, soccer mom, but they are losing the cool factor with the young and tech savvy.”

Jani, honestly, talk about tired. Those clichès and old canards you’re borrowing from the Apple-hating blogosphere need a serious refresh …

    Jani Ziedins May 1, 2013

    I’m dead serious, I live in suburbia and the only ones I know excited about the iPhone are my wife and her friends. All my guy friends have large screen Android phones. I would have one too except my wife refused to consider Android and I stayed with the iPhone just for synching calendars and grocery lists. The school my son goes to bought a couple dozen Android tablets because they were cheaper and easier for the technology teachers to set up and manage. All she needs to do is scan a QR code and it will be set up exactly the way she wants with all the parental controls an elementary school needs. American Airlines gave all their flight attendants and mechanics 23,000 Android tablets instead of iPads for the same reason. I am writing this on a 27″ iMac and it will probably be my last Mac computer because the new ones are glued shut to specifically to prevent me from upgrading any of the internals.

    Just because the soccer mom thing is cliche doesn’t make it any less true.

    Story about AA’s Android selection
    http://www.talkandroid.com/153753-american-airlines-cto-talks-android-selection-decision/

Peto1 May 1, 2013

So then why not just do it – let go of your Apple obsession and, by any means possible (and with extreme prejudice – I get it) go knock yourself out with all the great Android products available to you …

    Jani Ziedins May 2, 2013

    I’m not obsessed with AAPL, I cover it as much as I do because it is the most owned stock by individual investors and those are the people reading my blog. On StockTwits it is the most tweeted and followed stock by a wide margin, so obviously other people care about it. Just because you don’t agree with my analysis doesn’t make it less valid. Great company or not, its fallen out of favor with the stock market and there are plenty of examples of past darlings to compare it to. Unfortunately for AAPL bulls it doesn’t look good. The most dangerous words ever uttered in the market are “this time it’s different”.

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