Holding recent gains

By Jani Ziedins | Intraday Analysis

Oct 21
S&P500 daily at 1:50 EDT

S&P500 daily at 1:50 EDT

Stocks dipped modestly by midday, yet continue hanging on to 1740 following the Debt Ceiling bounce.  Earlier in the day we set another all-time high as the market continues moving beyond earlier fears of Taper, Syria, Shutdown, and Default.  The rate of gains has slowed in the second half of the year and we are currently at the upper end of this channel.

Markets typically decline swiftly and grind higher, but the last six-months flipped this conventional wisdom on its head as we grind lower and explode higher.  The market is up nearly 100-points in less than two-weeks and this surge follows similarly powerful rebounds in April, June, and August.

While most bears claim this market is complacent and overbought, the evidence points to the contrary.  These explosive moves are a direct result of unsustainably negative sentiment.  The crowd pushes the market lower in anticipation of the next correction, yet the spring explodes higher in their face each time.  Too often people mistake trend for sentiment and that is exactly what bears have done.  Just because we are at all-time highs doesn’t mean we are complacent.  Traders are notoriously afraid of heights and few are embracing this strong market.  Instead they are predicting a correction following every bump in the road.  But these constant predictions of a correction keep the rally from overheating and topping.  As long as the crowd remains suspicious, the uptrend will persist and every dip is buyable.

Expected Outcome:
While the recent rebound provided an excellent profit opportunity for those willing to bet against the herd, that spring is now sprung.  Clearly we cannot continue the current rate of gains and the market needs to consolidate or at the very least slow down.  Recent gains leave us with an excellent profit-taking opportunity and is the right trade for many.  As gains slow, there is less reason to hold risk for modest upside.

Looking ahead, most of the big fears have been mitigated and the risk of a dramatic move lower on existing concerns is unlikely.  Many that sold defensively in recent months need to get back in, leading to year-end rally and that constant bid under the market will grind higher over the final two months.  It is up to the individual investor to decide if grinding profits are worth the risk of the unexpected.

Alternate Outcome:
While we largely put to bed the worst fears over Taper, Syria, Shutdown, and Default, we never really had to fear them because everyone was already talking about them and thus already priced in.  We rallied as the outcome was better than the worst case and all is right with the world again…….at least until the next crisis.  Currently there is not a lot of fear priced into the market and we will rally in this calm, but that is what leaves us vulnerable to the next unseen risk.  The problem with trading the unknown is there is no way to know when it is coming and how big it will be.  All we can do is wait and respond to the next crisis before the rest of the market fully appreciates the new risk.  For the time being bears need to be patient.  Don’t sell because we are too high, sell when the market is caught off guard.

Trading Plan:
Recent gains over such a short period make a nice place for proactive traders to lock-in profits and wait for the next trade.  Others can wait for more upside, but move up your stops to protect recent gains.  If the market grinds higher into the end of the year, we should hold above 1710.  If we fall under this level, we need to reevaluate our end of year outlook.

AAPL daily at 1:50 EDT

AAPL daily at 1:50 EDT

AAPL is surging higher ahead of the iPad refresh and tight supply for the iPhone5s, putting us at levels not seen since January.  It will be interesting to see if the excitement is warranted since the iPad upgrades are expected to be as evolutionary as the iPhone5s.  The market largely expects a Retina display on the mini and a new form factor for the 10″ model.  While these will help AAPL stay competitive with other tablets, it will not lead to a large wave of upgrades since these devices lack heavy subsidies.  Last year AAPL ran up to $700 on its reputation as an innovator and market leader, but even with recent upgrades to the iPhone and iPad lineups, we still haven’t seen anything truly innovative and disruptive out of AAPL in years.

TSLA is down 6% as it retests the 50dma.  If the stock finds support and bounces off this moving average, it is buyable, but if it fails to hold, expect a wave of selling to hit the stock as it crashes through large swaths of stop-losses.  If that happens, don’t buy the weakness and wait for it to find a bottom first.  With high-fliers, it is better to be a little late than a lot early.

Plan your trade; trade your plan


About the Author

Jani Ziedins (pronounced Ya-nee) is a full-time investor and financial analyst that has successfully traded stocks and options for nearly three decades. He has an undergraduate engineering degree from the Colorado School of Mines and two graduate business degrees from the University of Colorado Denver. His prior professional experience includes engineering at Fortune 500 companies, small business consulting, 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 children.