PM: Is this the start of something bigger?

By Jani Ziedins | End of Day Analysis

Apr 03
S&P500 daily at end of day

S&P500 daily at end of day

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.

AAPL daily at end of day

AAPL daily at end of day

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

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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.

Dylan April 3, 2013

Since your all about Inefficient Markets Hypothesis (Shleifer) you would understand money mangers Risk/Reward rules would favor rotating our of equities to corporate debt or high Div stocks due to large run up YTD, so arbitrage players will cash out in fear of loosing large YTD returns, or at least thats how i view it, would explain light volume melt up (bearish) plus massive negative momentum divergences relative to price (VERY BEARISH) so its pretty obvious a correction is coming.

    Jani Ziedins April 4, 2013

    I’m seeing the same stuff. The only question left in my mind is if this is the one, or if this rally can hang on for a bit longer. I’m short, but openminded enough to know these rallies go longer and further than anyone expects.

Rocabye April 3, 2013

Apple is the same old story. You have to be exhausted having to say the same thing every time. The sell pressure is beyond immense, to the point of suffocating.

Far as the market goes im not too worried. We’re pretty close to the famous April/May hiatus, so a pullback in conjunction with that time period sets us up beautifully to take a run to new highs in the second half of the year. That being said we’ve been in this bull market for 4 years now, so I don’t expect to continue marching on blissfully without a downer year in the next 1 or 2.

    Jani Ziedins April 4, 2013

    My thoughts exactly

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