The Chase is On

By Jani Ziedins | Intraday Analysis

Oct 22
S&P500 daily at 1:27 EDT

S&P500 daily at 1:27 EDT

MARKET BEHAVIOR
Stocks ramped up following an employment report that missed expectations.  This pushes us to fresh all-time highs as we continue the nearly year-long rally off the post-election lows.  This move clearly broke the summer’s 1500-1600 trading range and is in the middle of its next directional move.

MARKET SENTIMENT
The market is well above previous highs and anyone holding a diversified portfolio is sitting on profits.  This rebound rewarded everyone who held recent weakness, making them even less likely to sell the next dip.  Fewer sellers equals tight supply, allowing us to continue rallying on modest demand.  Low-volume strength has been the theme of the year and it will likely continue into year-end.

This run-up is pressuring anyone still sitting on the sidelines.  Those that sold recent weakness are looking for ways to get back in and this surge leaves them stuck between a rock and a hard place.  Do they chase new highs, or wait for a pullback?  So far anyone waiting for a pullback keeps falling further and further behind.  They can only wait so long before they are forced to buy this strength and the pressure to chase will keep a bid under the market as the desperate buy every dip.

The market is up 20% for the year and most money managers are well short of their benchmarks.  This is the easiest buy-and-hold market no-one trusts.  Even bulls are suspicious of this strength and wondering if they should lock-in profits.  This doubt is the fuel that keeps propelling us higher.

This morning’s price-action indicates many traders still believe bad is good as they bought the weaker than expected employment.  The theory goes that prices rally on excess liquidity from QE and a struggling economy makes it more likely the Fed will keep printing money.  At least that is how the financial press is justifying today’s strength, but the truth is bears are running out of reasons to hate this market and their buying keeps pushing us higher.

Source: Yahoo Finance 10/22/2013

Source: Yahoo Finance 10/22/2013

TRADING OPPORTUNITIES
Expected Outcome:
The theme of 2013 has been a relentless rally that humbled anyone questioning its strength.  While this market will end like everyone before it, it will go further and longer than anyone thought possible.  Expect participants to transition from fear to greed as owners stop selling weakness and buy every dip.  While markets top on complacency and greed, they rally as these feelings take over and we only top once everyone gives up fighting the strength.  So far we are early in this transition and more upside remains.  The adjacent survey shows that while bullish sentiment increased from the low 20s a couple of months back, more traders are neutral on this market and we are still a long way from irrational exuberance.

Alternate Outcome:
The Fed and our politicians kicked their respective cans down the road and we are still awaiting the ultimate day of reckoning.  While the market is coming to terms with fiscal and monetary austerity, the uncertainty surround these events still pose risks.     But since these two topics have been so widely dissected and traders largely formed an opinion, they are less likely to trigger new waves buying and selling.  The bigger worry is an unexpected headline that no one is talking about and not priced in.  Markets only move when people change their minds and without a doubt there is something lurking out there what will cause traders to lower their expectations.  We don’t know what it is or when it will happen.  All we can do is wait and react before everyone else.

Trading Plan:
The last few weeks saw monster gains and we should be looking for places to take profits, not initiate new positions.  The cautious can sell into this strength and the optimistic can move up their trailing stops.  Given today’s strength, we could put tight stops under 1740 or 1730.  Those that want to give the market a little more room can use 1710.  Either way, don’t let recent profits evaporate.

NFLX daily at 1:29 EDT

NFLX daily at 1:29 EDT

INDIVIDUAL STOCKS
Shocking reversal on NFLX as Reed Hastings sabotages the stock one more time by insinuating the stock is getting ahead of itself.  The stock opened $35 higher and is now down more than $20.  A reversal this dramatic is unlikely to be a one day event.  High flying stocks are almost entirely sentiment driven and this reversal will likely rattle the confidence of holders and prospective buyers.  Expect demand to dry up over coming days as potential buyers wait to see if weakness persists and in a self-fulfilling prophecy, this lack of demand will pressure prices further.  If anyone wanted to short this stock, here is your invitation.  I would use yesterday’s close as a tight stop, or better yet use an option strategy to control your risk.

AAPL is in the process of releasing its new iPads.  Most of the news likely leaked out ahead of time and is already priced in.  Like the iPhone refresh earlier in the summer, we could see a buy the rumor, sell the news if AAPL doesn’t produce anything exciting and unexpected.  Jobs always killed it with his “one more thing”, but it’s been years since AAPL surprised us with anything unexpected.

TSLA is another momentum stock struggling in recent days.  It tested and slipped under the 50dma for the only the second time since this monster run began back in April.  Bulls are waiting for the dip buyers to jump in like they have every other time, but eventually there comes a point where everyone who wants some already has some.  Keep an eye on the 50dma and if we fail to hold this widely followed moving average, selling will likely continue.  Most recognize this is a momentum stock and its bubble will pop eventually.  There is nothing wrong with riding it up, but don’t take the round trip.

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.

Shane October 23, 2013

I think this is a little revisionist. The CW before the iPhone released was “apple is making a phone.” And the CW before the iPad was “apple is making a tablet.”

I remember being very surprised about the Macbook Air. And then underwhelmed at that first revision of the product when I actually tried to use it.

Today there are more leaks because there’s more exposed surface to leak from. Apple as a physical thing just has many more parts and pieces.

I agree the apple event was priced in but the 1% it gave back that day was nothing important and the trend into Apple’s earnings has thus far been strong. We will see if that maintains. I think it will, though I am suspect of anybody thinking we’ll see a > 10% pop on ER. $550 though has been my ER price target, I entered into the stock not quite a month ago at $471 with the intent of holding through earnings and on a small drop a few days later added to my position with Nov16th $495 calls.

Anyway, predictions are hard work, so I don’t hold it against you that you weren’t perfect 🙂

    Jani Ziedins October 23, 2013

    Traders are not valuing next quarter’s earnings, but next year’s. The reason AAPL never got a rich valuation is WS expects AAPL to fall like every other hardware darling before it. Given the nearly constant erosion of market share, they were not far off. It is only time before pricing and margin pressure follows. Great company and great products, but the same was said about Palm, Nokia, Motorola, and RIM.

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