WR: A Great Week

S&P500 weekly at end of week

Weekly Review

MARKET BEHAVIOR
Stocks had another great week, up 2% and finishing near the highs.  We smashed resistance at 1600 on Friday and set new all-time highs.  Weekly volume was a little above average and capped a very respectable week for the market.

MARKET SENTIMENT
This is the rally that just won’t quit.  I turned cautious back in early March, figuring the market needed to cool off, but repeatedly failing to breakdown invalidated my original thesis.  When things don’t work out as expected, we have to adapt.  The decisive rebound starting on April 18th is what finally convinced me I was wrong.  Everything pointed to the market going lower, yet it bounced hard and weak markets don’t hold up the way this one has.

The reason this rally keeps going is everyone else also saw what I was seeing, but the obvious trade is rarely the right trade.  These cautious investors locked in profits and waited for the widely expected pullback.  These waves of profit-taking and shorting are what forced the market into sideways trade for most of March and April.  I heard plenty of people talk about how overly bullish the market was, but the conspicuously absent voice was from the alleged masses of raging bulls.  When all we hear from are the skeptics, that means the skeptics the majority.

The biggest mistake traders make is assuming price and sentiment are the same thing.  A rising market is “obviously” bullish, so a market that’s risen for months on end is clearly overly bullish.  The truth is this market was overly bearish and that is what lead to this six-month rally off the November lows.  We were so buried in bearishness, pessimism, and cynicism that we are still digging ourselves out.  What appears like overly bullish is really less bearish.

TRADING OPPORTUNITIES
Expected Outcome:
Friday’s breakout could be the last gasps of this rally, signal the start of the widely expected selloff, and be the fourth consecutive “sell in May”, but until it shows real signs of breaking down we must stick with the rally.  The rally that defies logic and common sense will likely continue infuriating skeptics.  I have no idea how high or long this rally will go, but fighting it is the wrong trade.  The sheer amount of skepticism and caution  leads me to believe this rally can carry us through summer.  If the easy trade is sell in May, then the right trade is buy in May.  This market is clearly oblivious to headlines risks and it is naive to think it will wake up tomorrow and suddenly worry about some obscure data point when it ignored so many major ones.  When in doubt, stick with the trend and that is clearly the best trade here.

Alternate Outcome:
This rally will end at some point, most likely when everyone expects it to continue higher.  We are closer to that point than yesterday, but the widespread disbelief means we are not there yet.  No matter what we think, we must remain vigilant.  The best way to spot a selloff is to look for selloff.  As obvious as that sounds, don’t doubt this market until we start making lower-highs, lower-lows, and break key support levels.

Trading Plan:
Traders have been reluctant to chase new highs over the last few months and prefer waiting for a modest pullback before accumulating shares.  We will likely see the same thing here so anyone out of the market is better served waiting a couple of days for a pullback to 1600 or 1590.  If you miss the trade because the market takes off here, remember it is always better to be out of the market wishing you were in, than in the market wishing you were out.  Failing to hold 1580 shows big money is not buying the near-term dip and we need to look for support at the 50dma.  Slicing through the 50dma and continuing past 1540 means the widely expected selloff is finally taking hold.

AAPL weekly at end of week

INDIVIDUAL STOCKS
Much to the delight of bulls AAPL is holding above the 50dma and leading many to believe this is the rebound everyone’s been patiently waiting for.  As long as the market holds above the 50dma, the stock is holdable.  I remain a skeptic, but this stock will eventually find a bottom and this very well could be it.  Every trading plan starts with a stop-loss and pulling the ripcord if the stock falls under the 50dma will prevent us from sitting through another leg lower.

Volatility is picking up in LNKD and buying a speculative stock like this should come with a bottle of Tums.  If the stock holds and bounces decisively off the 50dma, keep holding, otherwise this is a decent place to lock in profits.  Bulls make money, bears make money, and pigs get slaughtered.  When a stock is up 50 or 60% over a couple of months we must consider locking in profits.

AMZN continues frustrating both bulls and bears.  Between the 200dma and 50dma it is in no-man’s land.  It is fun to speculate in names like this, but don’t mistake this for an investing opportunity.  Keep position sizes small so it doesn’t hurt much when we are wrong.

Plan your trade; trade your plan