Stocks gapped higher on an apparent softening of the standoff in DC. Stocks recovered the 50dma by midday as shorts scrambled to cover. The surge reclaimed support at 1680 and unwound two and a half days of what now looks like fearful, herd selling.
While we don’t have an agreement from our politicians, the shift in rhetoric by both sides signals they are moving toward a workable solution. This alleviates some of the worst-case fear that stubbornness would push us into default. While there are still risks this fragile coming together will blow up over minor details, in typical market fashion, prices surge in anticipation of a deal and anyone waiting for the news confirmation will be a day late and a dollar short.
Much of today’s rebound is driven by short-covering and the rate of gains will taper, possibly even pullback after shorts finish covering. Lets be clear, we haven’t ended the standoff and should expect ongoing political posturing to continue contributing to volatility, but the sharp selloff the last couple days shook free many of the weak holders, leaving far more confident owners in their place.
As we discussed yesterday, many long-viewed investors saw little reason to sell the near-term political uncertainty and this tightened supply once the more active traders ran out of stocks to sell. Fundamentals and headlines don’t move markets directly, only supply and demand does that. No matter what the news or trader expectations, when we run out of sellers, we bounce on tight supply.
Know when to hold’em, know when to fold’em. Savvy traders sell strength and buy weakness, but most often our gut instinct is to buy strength and sell weakness. There is a very elusive line between confidently holding through a temporary dip and stubbornly riding the market lower. That fine line is the difference between winning and losing. Of course the least stressful trading strategy skips this ambiguity and sells strength, letting others debate holding or selling the weakness.
While the market is going through a temporary reprieve from the risks of default, this political battle is far from over and we are simply delaying the day of reckoning. While a meeting of minds shows a more conciliatory side of our politicians, expect the rhetoric (and volatility) to pick back up in coming days and weeks.
While our politicians can be commended for moving a few inches off their initial positions, they have not changed their goals and are simply buying more time to fight for their positions. Recent flexibility from Obama is rekindling hope in some that they can continue pushing on Obamacare. While that is obviously a non-starter, that threatens to return this standoff to square one and reignite fears of a default. Just when we start feeling better about the political process, our elected representatives do something to disappoint us.
Tough day to be a short and shows why counter-trend trades need to harvest profits early and often. On the other side, bulls should expect some of this euphoria to pass as the political bickering resumes. There is little urgency to chase this rebound since we will likely consolidate between 1680 and 1700 until the debt ceiling is actually lifted. At the same time, the market is buyable for anyone looking to get in. Keep a stop under the 50dma and shorts can use this same level to re-short the market if negotiations breakdown and a default is back on the table.
AAPL is up, but failing to keep up with the broad market’s gains. While the rally back to $500 was impressive, the last few weeks of sideways trade killed most of that momentum. Everyone still loves AAPL, but that is its biggest problem. Companies like NFLX and FB staged spectacular turnarounds because they were some of the most hated stocks following their high-profile selloffs. AAPL never reached that wide level of disdain and ridicule, meaning it is not ready for a similar comeback.
TSLA is still holding above the 50dma. A breather after such a strong move is normal and expected, but watch for a wave of stop-loss selling and shorting to hit the stock if it dips under $160. If this leg stalls, the stock is buyable. If it accelerates, watch out as the crowd rushes for the exit at the same time. Remember, TSLA is just a stock and a meaningless piece of paper once it stops going up. If you love the car, buy one, but don’t fall in love with the stock.
Plan your trade; trade your plan
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.