Ignore what everyone is talking about

By Jani Ziedins | Intraday Analysis

Oct 04
S&P500 daily at 12:50 EDT

S&P500 daily at 12:50 EDT

MARKET BEHAVIOR
Stocks were modestly higher as the Shutdown stretched on for a fourth day with no end in sight.  Through midday trade, the market continues holding support at the 50dma for the fifth consecutive day and remains near the upper end of the summer’s trading range in spite of the headline driven uncertainty.

MARKET SENTIMENT
As obsessed as traders are over developments in Washington, or lack thereof, the market is holding up remarkably well, only down 2.6% from all-time highs.  Most bears claimed a gov’t shutdown was not priced in, but the resulting trade proves otherwise.  This is just another example of the more people talk about something, the less we need to worry about it.

While most investors recognize the temporary nature of the Shutdown, there is greater concern over a potential default on Federal debt.  There is no precedent for this and the longer the budget and debt ceiling standoff continues, the closer we come to this deadline.  Nerves remain relatively restrained so far because Boehner assures us the GOP will not allow us to default.  At least that is one thing both sides agree on.

Moving past politics, we’ve seen relatively limited selling in spite of the uncertainty.  This means those afraid of the Shutdown bailed out a while ago, while those still holding are not focused on near-term headlines.    Bulls and bears alike expect the market to pop on an eventual resolution, so no one wants to be the guy who sold just before that bounce.  With so many owners sitting on their hands, that limits supply and keeps a floor under the market.

Successful investors don’t think about what the market should do, but what other traders are doing and how that affects future trade.  With all the worrywarts already out of the market, we hold up quite nicely in spite of the headlines and political posturing.

TRADING OPPORTUNITIES
Expected Outcome:
When the market should crack wide open, but holds firm instead, that means our core thesis is flawed and we need to reevaluate.  Strength in the face of this uncertainty is bullish because it shows most holders don’t want to sell no matter what the headlines scream.  The resulting tight supply makes it far easier for the market to stabilize and ultimately rally once this situation is resolved.  Since the selloff leading up to this was fairly modest, don’t expect a powerful rebound.

Alternate Outcome:
With each passing day, those expecting a quick resolution sell to more confident investors with a longer view.   The one assumption most holders have is this situation will be resolved without too much damage to the economy or markets.  While this is still the most likely outcome, there is a chance this political game of chicken goes horribly wrong.  At this point the GOP’s pride and credibility is at risk and could result in them stubbornly holding out long past what is rational and reasonable simply for the sake of saving face.

Trading Plan:
Stocks are holding the 50dma, all be it with some sideways chop.  The most adventurous can buy support with a risk adjusted position size, but they should recognize the real risks of new lows next week.  But holding support for this long in the face of this uncertainty means we are not poised to crash lower, meaning the real risks of owning are not as large as they feel.  Most of the time that reality vs emotion skew sets up a favorable risk/reward.

Shorts waiting for the market to split wide open should reevaluate their positions because the market had every opportunity and invitation to sell off, yet is holding firm.  That likely means there are fundamental flaws in the bear’s thesis that need to be identified and considered.

Expect volatility to persist, but continued support suggests a crash on current headlines is unlikely.

TSLA daily at 12:50 EDT

TSLA daily at 12:50 EDT

INDIVIDUAL STOCKS
AAPL is holding the 50dma, but cannot reclaim $500 following the successful launch of the iPhone5s.  While there was a lot of excitement leading up to the new product cycle and strong rally up to $500, but the rally is stalling.  Maybe we are simply building a base and consolidating recent gains before resuming higher, but the thing that makes bases work is it convinces many the run is over and so far shareholders remain upbeat.  Many billionaire investors have come out in support of AAPL, but that concerns me because it means most of these people are already fully invested.  If everyone believes in this story and already owns shares, who is left to buy?  Things that are too high usually keep going higher (TSLA) and those that are too cheap usually keep getting cheaper.  Unfortunately AAPL falls into that latter group.  I’m sure the company will do fine, but the stock could easily be entering a mature phase, meaning it is more attractive for its dividend than price appreciation.  This happened to previous titans of tech and it is foolish to assume AAPL is different.

Speaking of TSLA, the stock is bouncing after a couple of days of sharp selling following another downgrade and a battery fire caught on video.  So far the stock is respecting the 50dma, and remains holdable, but this stock is extremely extended from its original pivot point and that makes each subsequent breakout less likely to succeed.  Remember, all stocks are bad unless they go up.  DO NOT fall in love with TSLA.  Date it and leave it when the ride is over.  While we might still see some upside, this is clearly a momentum/bubble stock and anyone arguing to the contrary risks giving back all their profits when it inevitably returns to a more reasonable valuation.

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.

jj October 4, 2013

at what point would investors who are not selling in the face of shutdown continuing and default happening be catergorized as being complacent? seems to me that everyone expects a resolution so no one is selling. when exactly did the worry warts sell if mkt is only down 2% or so? On the contrary, I think inventory positions at trading desks and funds are highly long right now and any bounce on a resolution should be sold into by short term traders. everyone expects resolution…that’s the sentiment right now.

    Jani Ziedins October 4, 2013

    I agree with you. a nonexistent sell off leaves little upside from the resolution rally and I will be looking closely at the pop as a place to exit. how the market responds to support following the pop will be very telling. if we hold it, then the party continues. if we cannot hold gains and break back through support, that means buying exhausted itself on the debt ceiling resolution and look out below.

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