PM: Nice recovery

By Jani Ziedins | End of Day Analysis

May 10

PM Update

MARKET BEHAVIOR
Stocks recovered much of yesterday’s selloff thanks to a surge into the close.  Volume was light, but most of this rally has been ‘suspiciously’ light and so far it worked out, so we shouldn’t read too much into it.

MARKET SENTIMENT
Buyers won’t allow much weakness to develop before they swoop in and buy a dip.  Anymore ten-points is a buyable as anxious, big-money feels the heat from missing this rally.  Here is an interesting article from Yahoo Finance discussing how upset the hedge fund community is with Bernanke and his easy money policy.  You’d think a rising market would  have these guys gushing with praise, but “smart” money missed this rally and their pessimism is making them look downright foolish. They blame Bernanke for their struggles because obviously the guy in the mirror had nothing to do with it.

Everyone insists this market is overly-bullish, yet there is little data backing this up.  There are the grossly bearish surveys I shared earlier in the week, and now we have these grumpy hedge fund managers who are humiliated by their underperformance.  Everyone assumes this market is rising because it is so bullish, but they have it completely backwards   This market is rallying because everyone is bearish!  We need new buyers to push prices higher and there is no disputing this market keeps going higher.  No matter what anyone says this market found an endless supply of new money and we are anything but overly-bullish.

The easy answer people throw out is Ben is inflating stocks, but I bet most of these accusers cannot explain how he is doing it.  They simply repeat what

S&P500 daily at end of day

S&P500 daily at end of day

the talking heads say on TV say or the guy in their coffee club told them.  Ben is buying bonds and bonds have never been higher.  People don’t sell things that keep going up and any outflows from bonds have been relatively modest.  Falling prices will drive bond holders to stocks but so far bonds have done nothing but go up.  There is some chase for yield, but that is a fairly modest phenomenon.  The simple truth is stocks continue rising because all the pessimistic bears have been dead wrong on all accounts and they continue being wrong.  Double dip, Euro Contagion,  Debt Ceiling, Sequester, you name it, the bears got every single thing wrong and the market continues higher because the real world is far better than people make it out to be.

TRADING OPPORTUNITIES
Expected Outcome:
Keep doing what is working.  We could see a near term dip to 1600, but buyers’ ferocious appetite for dips might prevent us from retesting this level.  As long as we hold 1600, the rally is alive and kicking.

Alternate Outcome:
At some point he cynics will be right and we all know this market cannot go up forever.  Look for a series of lower-highs and lower-lows to signal demand is drying up.

Trading Plan:
We can hold this market as long as it remains above 1600.  A dip under this level makes us more cautious and we should raise cash, but any bounce should be bought.  So far this market is only getting stronger in May and this could be the start of the first robust summer in over five years.  Failing to hold the 50dma is when we start getting nervous.

INDIVIDUAL STOCKS
AAPL didn’t see the same late day rebound as the rest of the market and finished near the day’s lows.  There are few traders more arrogant than AAPL bulls and is why I still think we have not seen the final purge in this stock.  We are remain above the 50dma and it is holdable here, but everyone should keep this on a tight leash because breaking the 50dma will likely set off a wave of stop-loss selling and shorting, pushing it to new lows.  Of course finding support from big money at the 50dma means we have a near-term bottom and it is setting up for a nice swing-trade.  The next negative catalyst is the release of a warmed over iPhone5s.  If this phone fails to impress, look for sellers to punish the lack of innovation.

GLD reclaimed most of the gap lower, but watch for support at $140 to turn into resistance.  If Gold cannot reclaim this level, look for lower prices in the near future.

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.