AM: Another leg higher

S&P500 daily at 1:19 EDT

AM Update

MARKET BEHAVIOR
Stocks surged to new highs as the breakout continues without the widely anticipated pullback.

MARKET SENTIMENT
There is no obvious news justifying today’s 15-point jump, but here we are.  As we know, fundamentals and technicals don’t drive markets, people do, and right now they are chasing this market with reckless abandon.  It isn’t because they love this market, but because they are afraid of being left behind.  The huge pool of cynics and pessimists is fueling us higher as the market’s resilience forces them to change their minds.

The only thing that moves markets is buying and selling.  Most of the cautious and bearish sold weeks, even months ago.  There is little selling pressure left, but more than that, these pessimists are the next round of buyers.  Everyone is dumbfounded by this market because it isn’t behaving the way they expect, but once you understand what everyone thinks, how they are positioned, and what moves are available to them, this rally makes perfect sense.

Source: Yahoo Finance 5/14/2013

According to another poll on Yahoo Finance, pessimism is waning as traders start embracing this rally.  Over the last couple of weeks I posted surveys showing only 15% believed in the economic recovery and over 60% expected a pullback.  Today’s traders are more evenly split between those afraid of this market and those expecting higher prices.  This dramatic shift in sentiment is where all the new buying is coming from, but when everyone embraces this market is when we need to be the most nervous.  I’m not saying we are at extremes yet, but we need to be increasingly cautious and not get caught up in the euphoria.

We continue rallying because the pessimists have been wrong about the US economy, Europe, China, and everything else they were afraid of.  Embrace fearful markets and fear complacent ones.  Many will claim this is a complacent market, but they are mistaking price gains with sentiment.  This market is still extremely cautious and reluctant to embrace recent highs.  We will see pullbacks, corrections, and bears  along the way, but secular bear is dead and we are already well into the next secular bull market.

TRADING OPPORTUNITIES
Expected Outcome:
There is a good amount of chasing going on today between short covering and former pessimists buying the rally.  The easiest and best money is made early in a move when doubt and cynicism are highest.  After running over 100-points in just a couple of weeks, this is a better place to sell than initiating new positions.  Traders buying here are a bit late to the party.  That doesn’t mean we will pullback, but the risks are higher after such a strong move.

Alternate Outcome:
Sentiment is shifting as fear of this market is replaced by fear of being left behind.  This rally will top and pullback because every market does, the only questions are when and how much.  Clearly we don’t want to get in the way of this freight train, but we need to continue watching for sings of slowing buying.

Trading Plan:
The optimistic, but disciplined trader should move their stop up to recent support at 1620.  The cautious trader could sell into strength and lock-in profits.  Obviously the rate of gains cannot continue indefinitely and we are in this to make money.  The only way we can do this is selling our winners.  Sell when we don’t want to sell and buy when we don’t want to buy.

GLD daily at 1:19 EDT

INDIVIDUAL STOCKS
AAPL and GLD are not sharing in the market’s success today.  Both are struggling to find follow-on buying after impressive bounces.  While it is hard to compare a tech company to a commodity because they are so different, the people trading them think the same.  Both suffered from extremely harsh selloffs and represented irresistible values to dip-buyers.  While the rebounds made for quick profits, both struggle to attract a wider audience needed to continue the price gains.  AAPL will likely retest the 50dma at $440.  If big money believes in this company again, this is where they will step in and buy.  Failing to find support means everyone who wants AAPL already owns it and there is nowhere to go but lower.  GLD is destined to retest $130 for all the same reasons.

Plan your trade; trade your plan