Monthly Archives: November 2013

Nov 25

Slow holiday week

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

S&P500 daily at end of day

MARKET BEHAVIOR
Stocks gave up a modest 0.1% in a light, holiday week session.

MARKET SENTIMENT
Most of the senior traders are on vacation, leaving junior guys in charge of the trading desks.  That explains the light volume, but it also gives us insight into the kind of moves we might expect.  Most of the intelligent thought occurs on the buying side of a trade and is the domain of the most experienced managers.  On the selling side, they largely have set profit targets and stop-losses that trigger sales.  With the senior guys on vacation, we shouldn’t expect rookie traders to initiate new positions or buy dips without the oversight and approval of their bosses.  On the other hand, they do have their orders to sell when stocks hit predetermined price levels.  Limited buying authority and strict sell rules create the potential for a larger than normal selloff  since there will be fewer buyers ready to catch the dip.  That doesn’t mean this will happen, but we should expect fewer dip buyers if we stumble into some weakness.

TRADING OPPORTUNITIES
Expected Outcome:
With few traders looking to buy aggressively this week, we shouldn’t expect a strong move higher.  On the other hand, crossing stop-losses could trigger a wave of selling and we could fall further than expected without the support of dip buyers.

Alternate Outcome:
We have stop-losses on both sides of the market and any strength could trigger a short squeeze, sending us even higher.  Given the low volume of the holiday week, it doesn’t take much buying to move the markets sharply higher.

Trading Plan:
This skew between buying and selling authority over the holiday week sets up a favorable short given the potential for limited dip buying in the face of any weakness.  Or the simpler move is sitting out the low-volume week and taking a well deserved break from the markets.

FB daily at end of day

FB daily at end of day

INDIVIDUAL STOCKS
FB continues to struggle following its most recent earnings call where the company hinted at weakness among young users.  On the opposite side, NFLX seems to be recovering from its earnings call driven selloff when Reed Hastings suggested the stock might be ahead of itself.  While not close to the post-earnings spike, the stock is staying well above the 50dma and challenging $350.

AAPL is consolidating recent gains and letting the 50dma catch up as owners hope for a strong holiday season.  With all new iPhones and iPads, this is the time for the company to reverse the market share losses and reclaim some of its mojo.  AAPL bulls are wishing for a China Mobile deal for Christmas, but while they’ve been waiting years for this deal, Android has become the smartphone of choice and AAPL’s China marketshare is in the single digits.  Will wealthy Chinese really dump their five-inch Android phones for the cool looks of an iPhone?  Only time will tell.

Plan your trade; trade your plan

Nov 21

Next greater fool

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

S&P500 daily at end of day

MARKET BEHAVIOR
Stocks recovered the bulk of the last three days of selling and finished a few points shy of 1,800.  Volume was higher than the three prior down-days, but below average as we approach next week’s holiday shortened week.

MARKET SENTIMENT
Dip buyers jumped in and reversed this week’s modest selloff.  If buyers continue supporting these levels in coming days, that invalidates the thesis we are running out of buyers.  Markets often roll over quickly and holding up here for a couple more days prevents us from seeing that quick move lower.  Often that means the next is higher.

Markets roll over for one of two reasons, bad news but also paradoxically, good news.  The first one speaks for itself and there is no reason to cover it here.  The other is running out of buyers when the bull market wins over last of the fearful and finally convinces everyone to buy.  It successfully defeats every objection these pessimists have and they rush in as the final piece of good news falls into place.  From then on, it doesn’t matter how bullish follow-on stories are, the market cannot go any higher because everyone already bought in.  (Obviously terms like “everyone” are hyperbole, but you get the idea.)

Since the current market doesn’t have fearful headlines obsess over and by rule it is impossible to predict the next unexpected catastrophe, we are left deciding how many buyers are left to keep buying the good news.  Over the near-term there are a finite number of traders ready to put their money into the market.  While there are gigantic mountains of cash stashed in bonds and money markets earning negative real rates of return, they’ve been there for the last five years and are unlikely to flood into the market tomorrow or next week.  No doubt this is a major fundamental catalyst that will fuel our secular bull, but for this near-term analysis we can ignore them.

Markets move up and markets move down, driven largely by the shifting outlook of short-term traders.  They buy when they feel good and they sell when they get nervous.  Institutional money managers and buy-and-hold investors skip these gyrations as they hold for 12-months or longer.  If we ignore the money hiding in bonds and don’t count the buy-and-hold crowd, we are left with this smaller and more active swing trading crowd.  These guys pushed us up to recent highs, but they don’t have the deep pockets to keep moving us higher.  Some claim we will see a chase for performance into year-end, but to be honest, the chase started 9-months ago and anyone still sitting on their hands this long is unlikely to make a move now.  So the question is, where are the next round of buyers coming from?  I have a hard time answering that question and is why I am reluctant to own this market in the near-term.

TRADING OPPORTUNITIES
Expected Outcome:
While the market can continue higher, there is not a big weight hanging over it and we lack that explosive catalyst to launch us higher.  On the other hand, we are over 60-points from the 50dma and 160-points from the 200dma.  Limited upside combined with lots of open air underneath us don’t setup a favorable risk/reward.  The market likely has a date with the 50dma and either we dip down to meet it, or we grind sideways until it comes to us.  Given that setup there is not a lot of reason to own risk here if we are not getting paid for it.

Alternate Outcome:
While we are not currently in a bubble, we could easily continue higher without pausing and put ourselves in one.  Only price pays and it makes no difference why this market goes higher.  Breaking to new highs could set off another round of short-squeezes and that upside momentum could continue convincing new investors to volunteer to be the next greater fool.  If they are giving away money, we might as well take it.

Trading Plan:
We trade when the odds are in our favor.  That typically means buying when we don’t want to buy and selling when we don’t want to sell.  It is a little too easy and comfortable to own this market, so it is probably a good time to take profits and wait for the next trade.  If a long insists, they could move a trailing stop up to 1,775 and see where this goes.  A short could take a stab at this with a stop above recent highs.

Plan your trade; trade your plan

Nov 20

Boiling a Lobster

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

S&P500 daily at end of day

MARKET BEHAVIOR
The slow motion slide continues for a third day.  The givebacks have been minor, less than 1/3 of a percent each day, on light and declining volume.  The market remains above previous resistance at 1,775 and is well above the 50 and 200dma.

MARKET SENTIMENT
So far everything looks great.  We are near all-time highs and the market is not fretting over a looming catastrophe.  This has to be the first time this year the market is not obsessing about something.  Even the last three-days are nothing to worry about since down-days are part of every advance.  This dip is so modest and orderly, few are worried about it.

But here is the thing, the market rallied through 2013 in spite of a nearly constant barrage of fear and pessimism.  You could even say the rally fed on it.  While it is great everyone feels so upbeat, should we be concerned about this shift in sentiment and outlook?

Declining volume shows many are not interested in selling this weakness.  Low-volume was very bullish this year.  The lack of selling keeps supply tight and makes it easier for prices to rally.  But no matter how tight supply is, we still need enough demand to keep up.  More than a bearish headline, the biggest risk for this rally is running out of buyers.

While I am not a bear by any stretch of the imagination, it is often noted that bull markets top on good news.  This is the headline that finally signals all clear and invites the last of the holdouts to jump in.  But no matter how great things look, markets decline without new buyers.  Between the elimination of fear and bullish feelings following Yellen’s confirmation hearings, could that be the good news that got everyone in the market?

There is a fundamental difference between headline driven selloffs and running out of buyers.  Unexpected headlines send everyone rushing for the exits at the same time, markets drop precipitously, but they find a bottom quickly.  The emotion and herd driven selling capitulates relatively quickly and allows the brave contrarian to buy heavily discounted shares from fearful sellers.

Demand driven selloffs are completely different.  Everyone feels good and they largely ignore weakness, assuming it is yet another buyable dip and they would be foolish to sell the weakness.  The market slips slowly, failing to raise any alarms or make holders nervous.  This is analogous to boiling an oblivious lobster by raising the water temperature one degree at a time.  In individual stocks we’ve seen this behavior in AAPL and TSLA.  Are we on the verge of seeing the same thing in the broad market?

While I am reluctant to call a top, the recent change in sentiment and outlook is enough to concern me.  The best trades are the hardest to make.  Owning this market feels way too easy and that makes me suspicious.  We profit by owning risk, not comfort.  Things feel too comfortable for my taste.

TRADING OPPORTUNITIES
Expected Outcome:
It’s been a great ride over the last 12-months, but we all know this cannot go on forever.  No doubt I am likely premature, but it feels like sentiment is shifting and that invariably triggers a new a behavior from the market.  Maybe we trade sideways for a while.  Maybe we dip far enough to bring fear back into the market.  We won’t know when and how far this will go until we are in the middle of it.  Right now 1775 is the key level to watch.  After that it is 1740 and then the 50dma.

Alternate Outcome:
These things always go further and longer than anyone expects.  We are twelve-months into this rally leg and there is no reason it needs to end here.  As long as people keep buying the dip, this market will continue marching higher.  The current stretch above the 200dma doesn’t even come close to the record.  Doubting this market is going against the trend and countless traders have died for the cause of “too-far, too-fast”.

Trading Plan:
It all comes down to risk versus reward.  What is the upside from holding here as compared to the downside?  How much higher can the market go in the remaining months of the year?  How far can it fall?  While it can easily continue higher, a modest reward might not be worth taking an outsized risk.  We are in this to make money and the only way we can do that is by selling our winners.

MSFT daily at end of day

MSFT daily at end of day

INDIVIDUAL STOCKS
TSLA slipped to recent lows and gave back most of yesterday’s bounce.  While there is lots of room for this stock to bounce back, in situations like this it is better to be a little late than a lot early.  Wait for this stock to find a bottom before jumping in.  That means holding current levels for at least several more days and then buying the high volume bounce off a key level.

AAPL is holding support above $510, but other than that small ray of hope, the stock is lifeless.  The recent product launches and big name investors failed to reignite the growth stock.  While the dividend is nice, that might be the best part of owning this stock over the next decade.

On the other side of the fence, MSFT is near 10-year highs as investors cheer an impending change in leadership.  It also doesn’t hurt that the Windows phone doubled market share.  While the numbers are much smaller than the iPhone and Android, they are making the largest share gains, largely at the expense of BBRY.  It will be interesting to see what direction the next management team takes these promising phones and tablets as consumers start demanding full-powered mobile devices.

Plan your trade; trade your plan

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Nov 18

What happened to all the bears?

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

S&P500 daily at end of day

MARKET BEHAVIOR
Stocks notched new highs out of the gate, but stumbled into the close.  The market is well above prior resistance at 1775 and we will see how it responds if it retests support in coming days.  The 50dma is over 50-points away the 200dma is lagging by 150-points.

MARKET SENTIMENT
The market hit the skids when Carl Icahn made bearish comments regarding this market.  There are two ways to spin this.  First is this is only one man’s opinion and it is trivial to the big picture.  On the other hand, if this rally is so fragile that a single guy’s comments knock it down a peg, what will happen if there is a legitimate piece of negative news?

There has been a dramatic reversal in sentiment over the last several weeks.  A month ago bulls were an endangered species and many polls showed only 1 out of 5 respondents were optimistic.  Now it is the bears who have become scarce as their numbers are reaching similar lows.  Clearly the market rallied strongly from those bearish lows as all the pessimists converted to bulls and threw their money at the market.  But is the pendulum getting ready to swing the other direction?

Source: Yahoo Finance 11/18/2013

Source: Yahoo Finance 11/18/2013

In another Yahoo Finance poll, only 19% said they were bearish.  Everyone else was already invested and holding on for higher levels.  But the thing to remember is we only reach higher levels when new buyers bid up prices.  If everyone is already in the market, where are we going to find these new buyers?  Many point to the bond market and Main Street, and I completely agree, but that is the multi-year, secular bull story.  It takes years for those tides to turn and we are still in the early stages, but as traders, we exploit near to intermediate shifts in markets.  That means we need to focus on the money already in the market and ready to buy tomorrow and next week, not next year.  By most indications, much of that money is already committed to this rally and there are few cynics left to convert.  Another popular sentiment measure is the Stocktwits SPY stream.  It spent most of the last year well under 50% as cynics refused to believe in this Teflon rally, but now that all the risks have been removed and we have nothing but clear skies, it ramped up to 68% bullish.

Anyway you slice and dice this, bullish sentiment is getting frothy and it is no surprise that a single comment by a widely respected hedge fund manager could trip up the market.  Now the question is traders with cash will buy this 0.3% dip, or wait patiently for better prices in coming weeks.

Source: Yahoo Finance 11/18/2013

Source: Yahoo Finance 11/18/2013

TRADING OPPORTUNITIES
Expected Outcome:
While I think the market is poised to pullback, the size of the consolidation is up in the air.  This could simply be a retest of support at 1775, or we could crash 150-points and run into the 200dma.  What matters is how quickly this bullish fever breaks.  If we fall 20-points and everyone starts scrambling for the exits, then it will be a quick pullback.  But if we dip slowly and most make excuses for the weakness and keep their bullish outlook, that means we will slide further and longer.  Over the summer and fall we saw swift downdrafts arising from Syria, Taper, and Default.  That quick turnover allowed us to quickly find a bottom.  But if we don’t have a fear driven catalyst and instead slip slowly on weak demand, that will draw this out and likely go further than most expect.

Alternate Outcome:
Like everything in the markets, there is no easy sentiment signal to trade.  One time the market tops at 50% bullishness.  The next time it is 63%, and the time after it continues rallying well past 80% bullishness.  While 68% on Stocktwits is the highest its been, we could have said the same thing about 63% or 58%.  This thing might keep going well past 75%.  But that is the market.  If this were easy, everyone would be rich.  We very easily could recover the Icahn selloff and continue higher as we suck in the last of the holdouts.  There is always money to buy stocks, it is simply a matter of converting a fear of heights into the fear of being left behind.

Source: Stocktwits $SPY 11/18/2013

Source: Stocktwits $SPY 11/18/2013

Trading Plan:
It is hard to buy the market here.  We don’t have a news driven upside surprise since we already removed all the headline fear hanging over the market.  As a rule, we buy the market when it feels dangerous, not when it feels safe, and clearly this is the “safest” this market’s felt in well over a year.   If there is a coiled spring, it is to the downside as this giddiness deflates on either a bearish headline or simply running out of new buyers.  Long-term bears are giving up in frustration, making this the most attractive place to short the market in quite some time.  We can use recent highs as a stop-loss for any new short position.

INDIVIDUAL STOCKS
What is there to say about TSLA that hasn’t already been said?  As a trade, the problem with holding for the top is no one knows when we are at the top.  Dipping to $180 was simply another routine pullback before climbing above $200.  Then we slipped to $150 and clearly that was the wrong time to get out because the stock was on the verge of bouncing.  And here we are at $121.  A few months ago I suggested locking in profits near $150.  Clearly I was early since the stock went up another 30%, but at this point, selling at $150 looks pretty darn nice.  Never forget we are in this to make money and the only way to do that is selling our winners.

Plan your trade; trade your plan

Nov 14

Where’s the fear

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

S&P500 daily at end of day

MARKET BEHAVIOR
Stocks pushed ahead to new highs following Janet Yellen’s confirmation hearing.  We are just a few points from 1800, something that was unthinkable only a month ago.

MARKET SENTIMENT
It feels like there are only two opinions in the market, that stocks will keep going to the moon or we are in a bubble about to burst.  Where is the middle ground?  The people who say we need to take a breather and digest recent gains before marching higher?  Where are the nuanced opinions that say we need to pullback to the 50dma or traders should lock-in profits?  All I hear are these two polar extremes of buy, buy, buy and sell, sell, sell.  Maybe, just maybe, the truth lies between these two emotionally charged opinions.

I find it interesting how many people blindly attribute this market’s success to QE.  This year’s strength can’t possibly be because we shook off all the major risk factors people were worried about.  When is the last time you heard Contagion?  How about Cyprus?  Sequester?  Double-Dip?  More recently we put Shutdown and Default in the rear view mirror.  Who needs money printing when the market keeps removing all the uncertainty people were hiding from?

And here is why this is important.  If everyone believes QE is inflating this market and Yellen will continue the easy money policy, they will forecast higher prices for as far as the eye can see.  But what if it wasn’t easy money propping up this market, but overcoming fear and uncertainty?  My theory is this market rallied on overblown fears turning into non-events.  If that is what really drove us to all-time highs, we need fear, not QE to continue going up.  But this is the first time in at least a year and a half where the market is not obsessing over some impending catastrophe.  Without fear, this rally might be running out of gas regardless of what the Fed plans on doing.

TRADING OPPORTUNITIES
Expected Outcome:
For the record, I am long-term bullish and think we are only a fraction of the way through a secular bull market.  When everyone says buy and hold is dead is the best time to buy and hold.  This is exactly what I am doing with my retirement account because I don’t need those funds for decades.  But in the near-term, I swing-trade extremes in sentiment with my trading account and it sure feels like the bearish views from earlier in the year are quickly being overtaken by boundless optimism.  The time to be excited about this market was in January, February, and March, not after a 25% runup.  Anyone just warming up to this market is a day late and a dollar short.  Buy when we are afraid, not when we feel safe.

Alternate Outcome:
These things go so much further than anyone expects.  That is what makes picking tops so perilous.  We might know exactly what will happen, but if we are early, in the market that is the same thing as wrong.  Everyone knows this rally will eventually stall, we are only debating the timing.

Trading Plan:
The market is most dangerous when it feels the safest.  Between endless QE and no material risks on the horizon, it sure feels like a safe time to hold stocks.  While I easily could be early, I feel the risks are growing with every leg higher.  If you don’t want to sell, at least use a trailing stop to protect recent profits.  Making money in the markets is easy, the hard part is keeping it.

TSLA daily at end of day

TSLA daily at end of day

INDIVIDUAL STOCKS
TSLA cannot get out of its own way.  Markets are making all-time highs, yet the auto maker is stuck near five-month lows.  There is a crisis in confidence and that is never a good thing in a stock that ran up more than 400% in half a year.  It will eventually recover, but let it prove itself first by reclaiming $150 and the 50dma.  For current owners, hope is not a strategy and we always need an exit strategy.  If the broad market stumbles, that weakness will hit high-fliers especially hard.

FB recovered the 50dma, but volume was anemic and didn’t signal a valid buy-point.  Keep waiting for that strong volume bounce off the 50dma.  If we don’t see that, don’t jump in because we could slip back under this widely followed moving average, especially is the broad market stalls in coming weeks.

Plan your trade; trade your plan

Nov 13

Buy the breakout?

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

S&P500 daily at end of day

MARKET BEHAVIOR
Stocks turned early weakness into all-time highs as this market keeps defying the skeptics.  The one-way rebound from the morning lows reeks of shorts tripping over each other trying to get out.  While not as strong as last Friday’s reversal, it ranks among the best gains we’ve seen over the last couple of months.  We continue trading near the upper end of a trading channel that dates back to spring and are well above the 50dma.

MARKET SENTIMENT
I’m contrarian by nature and today’s short-squeeze makes me suspicious.  We’ve come a long way, there are few worries to be found, and the market pops on “unexpected” news Yellen wants to continue Ben’s policies.  No doubt I’m late to the skeptic party, but that is by design.

It was a painful day to be short and many of the buyers were bears forced to cover their losing positions.  While bulls cheered the reversal and all-time highs, the red flag is seeing powerful trade from an already extended market.  Often we embrace powerful moves as signals of strength, but that only applies when there is a huge weight holding the market back.  That is the source of the coiled spring poised to explode higher.  We don’t have that setup here because worries are few and far between.  When we see unjustified strength, we must suspect looming exhaustion.

TRADING OPPORTUNITIES
Expected Outcome:
Now that most shorts have covered, who is left to buy?  That is a really good question.  One I cannot answer.  I don’t have a crystal ball and cannot call tops, but I do trade odds and right now the market feels extended.  While we can easily continue higher, without widespread fear as fuel, the chances of a big move are limited and at best this will grind higher.  On the other hand, if we run out of buyers, there is nowhere to go but down and we have well over 100-points of clear air between us and the 50dma.  While I’ve been a big proponent of this market because confident owners keep supply tight, if we run out of buyers, it doesn’t matters how tight supply is.

Now don’t get me wrong, I’m not expecting a market crash or anything of the sort.  It just feels like it is time for a step-back before resuming our climb higher.  We trade probabilities and risk/reward.  Right now the risks are large and rewards are small.

Alternate Outcome:
These things go so much further than anyone expects.  While we’ve come a long way, there is no reason we cannot continue higher as underweight money managers keep chasing this market into year-end.

Trading Plan:
We are in this to make money and when the potential upside is limited and the downside large, it is wise to take money off the table.  Since May the trade has been buying weakness and selling strength.  Right now we are at new highs and risk is greatest when we have no fear.

MSFT daily at end of day

MSFT daily at end of day

INDIVIDUAL STOCKS
TSLA was left out of the broad market’s party as it continues struggling with $140.  The euphoric, one-way buying is taking a break and it needs to reclaim $150 and the 50dma for the stock to get its mojo back.  TSLA departed trading fundamentals a long time ago and bulls cannot use them to justify buying and holding here.  This is a momentum name and until it regains it, we are best suited staying away.

AAPL also failed to enjoy the market’s good fortune.  All of this year’s good news is behind us and it will be months before there is another upside catalyst.  The stock is holdable as long as it stays above $510, but things could get ugly if it slips under $500 and the 50dma.

Surprise, surprise, MSFT is the newest momentum stock.  Only after something is ridiculed and left for dead does it present an interesting buying opportunity.  While everyone obsesses over AAPL and what a great value it represents, MSFT is the far better stock to own because it is going up and that is the only thing that matters.

Plan your trade; trade your plan

Nov 11

Bridge For Sale

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

S&P500 daily at end of day

MARKET BEHAVIOR
On Veterans Day, Stocks did a lot of nothing on extremely light volume.  We continue holding near all-time highs following Friday’s powerful rebound on stronger than expected employment numbers.

MARKET SENTIMENT
The front page of Monday’s WSJ was dominated by articles claiming the market is poised for a correction.  If anyone thinks journalists can call market tops, I have a bridge for you.

Sir John Templeton is famously quoted for saying “Bull-markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.”  It feels like this market is somewhere between skepticism and optimism.  No one believed the market could rally this year, but that is exactly what it did.  There was Obama’s reelection, Default part I, Sequester, Europe/Cyprus, Obamacare, Sell in May, Syria, Taper, Rising Interest Rates, Sept/Oct market crashes, Shutdowns, Default part II, and countless other excuses people used to stay away.  This is the rally no one trusts, yet it does nothing but march higher.  That sure sounds like skepticism to me.

Now we find ourselves in clear air for the first time in a while.  The market is no longer obsessing over headlines and the strongest criticism the cynics can come up  is “over bullishness”.  As the WSJ articles pointed out, many of the 2008/2009 sellers are slowly warming up to stocks again.  While journalists and bears would have us believe retail investors starting to come around signals a top, it isn’t early retail investors that signal a top, but the last of the holdouts. It isn’t when a couple of neighbors start talking about stocks at backyard BBQs again, but when everyone is bragging about their stocks.  While we are clearly progressing through the life-cycle of a bull market, we are still a long way from having the masses speculating in stocks again.

This steady conversion of risk averse into stock buyers is what will support the market for months, even years to come.  Between all the money hiding out in bonds and cynical hedge funds underperforming the bull market, there are plenty of buyers still available to push this bull market well beyond what anyone expects.  We don’t top when the cynics are calling for a top, we top when they give up.  As the WSJ articles and endless stream of critics show, we still are not there yet.

TRADING OPPORTUNITIES
Expected Outcome:

While there is still upside left in this bull market, markets move two-steps forward, one-step back.  Bull markets refreshes themselves one of two ways, a sharp pullback, or a long period of trading sideways.  With this many people calling for a top, it won’t take much of a dip to dramatically swing investor sentiment.  The potential dip will fall further than bulls are prepared for, but not as far as bears are hoping.  Between those two opinions, we will find a bottom.  Or alternately, this market could refresh by boring everyone to death with relentless sideways trade, forcing both bulls and bears give up in frustration.  Either way we need to cool off a little bit.

Alternate Outcome:
There is no reason stocks cannot ramp up another 10% before year-end, collapse under the 200dma by the same deadline, or do both.  Markets surprise us far more often than they do what we expect.  Of course between the bulls expecting further gains and bears calling for corrections, the least expected outcome might be a whole lot of nothing.

Trading Plan:
Until further notice, continue buying weakness and selling strength.  We are at the upper end of the recent consolidation and it would not surprise me to see the market surge into new ground on short-covering.  How the market behaves following those new highs will go a long way toward tellings us if we should sell the strength or buy the breakout.

Plan your trade; trade your plan

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Nov 10

Wild ride

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of week

S&P500 daily at end of week

MARKET BEHAVIOR
Stocks had a wild close to the week as we dipped 23 points on Thursday, but then recovered all of those losses on Friday.  As dramatic as the ride’s been, we are still holding within the 1750 – 1775 consolidation following October’s strong rebound.  While the daily chart shows a wild ride, taking a step back reveals a fairly benign weekly chart.

MARKET SENTIMENT
There are always two sides to every market and price is the perfect balance point between these two views.  Recent volatility chased out anyone that lacked the conviction to sit through Thursday’s sell off.  These sellers were replaced by far more confident owners willing to buy the weakness.  That confidence ended the selloff on Friday and turned it into a powerful short-squeeze that quickly turned the tables on the cocky bears gloating about the impending collapse only a day before.  But in the Bear’s defense, changes in trend are often accompanied by increases in volatility as the long dominant party starts losing its grip on power.  This shift evens the fight and allows the minority to start flexing its muscle.   It is too early to say which scenario is playing out and we need to uncover more clues in coming trade.

TRADING OPPORTUNITIES
Expected Outcome:
When in doubt, stick with the trend; it continues countless times, but reverses only once.  It’s been a good year and the rally that just won’t quit is unlikely to give the cynics what they’ve been looking for all year.  We’re coming to the end of the year and many of the last holdouts are conceding defeat and going with the flow.  While this is often part of the topping process, these shifts take time and the trend often continues farther than anyone expects.

S&P500 weekly at end of week

S&P500 weekly at end of week

Alternate Outcome:
Recent volatility has people  concerned and paying attention.  String together a couple down-days and confidence will quickly devolve into uncertainty and fear.  While it often takes a catalyst to send us lower, running out of buyers and topping on good news will signal a bigger pullback than the news-driven ones we’ve seen in recent years.

Trading Plan:
Continue watching for trading opportunities.  We remain stuck in a consolidation and until further notice, buy weakness and sell strength.  Since neither Thursday nor Friday’s moves materially breached recent highs and lows, look for a wave of stop-loss trading to accelerate a move out of this region, but if the a wider pool of traders does not embrace this breakout/breakdown, expect it to fade back into the consolidation.

Plan your trade; trade your plan

Nov 07

Where’s the Beef?

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

S&P500 daily at end of day

MARKET BEHAVIOR
Dramatic reversal in fortunes as the market opened strong on interest rate news out of Europe, but then collapsed nearly 30-points intraday.  This slide pushed us through 1750 and undercut last week’s lows.

MARKET SENTIMENT
There was no clear headline catalyst for today’s selloff and it appeared to be mostly herd induced selling.  Without any real meat to the story behind this slide, it is less likely to stick.  Complacent owners have been trained to ignore weakness since every other dip this year was a buying opportunity and anyone who sold headline fear-mongering came to regret that decision.  What are the chances these same owners will impulsively sell weakness that doesn’t even have a compelling story behind it?  Fear of selling prematurely, again, will keep most owners sitting on their positions this time.  Bears will criticize that complacency, but that resolve by owners to continue holding keeps supply tight and makes it far easier for the market to find a bottom.

Q:  If complacent owners were not selling, who was?
A:  All the active traders trying to outsmart the system.

Near-term volatility is driven by opinionated bulls and bears who insist on buying strength and shorting weakness.  Unfortunately, sideways consolidations are the exact wrong time to make these directional bets.  Bears shorted weakness last week, but were forced to cover during this week’s strength.  Then bulls bought the last few days of strength, only to get chased out by todays collapse.  And so the up and down cycle continues.  The thing to remember is active traders don’t have deep pockets and explains why these volatile moves fizzle so quickly.  Without bigger money jumping on this selloff, it will stall this time too.  Since most holders are increasingly comfortable with their positions, I don’t expect many to rush for the exits any time soon.  That resolve puts a floor under this market.

TRADING OPPORTUNITIES
Expected Outcome:
As discussed in recent weeks, we expected the market to consolidate and trade sideways following the 130-point rebound from the October lows. It shouldn’t surprise any of us these breakdowns and breakouts over the last two weeks stalled.  Now we are left pondering the latest selloff.  Another round of selling will likely push us down to 1740, but that could be where short-term selling exhausts itself and we bounce on tight supply.  But rather than try to catch the falling knife, wait for support.  This selloff could easily take us back to the 50dma or even 1,700.  While I expect a bounce sooner than that, the swing-trader in me would like to see a bigger selloff simply because that gives us bigger profit opportunities on the rebound.

Alternate Outcome:
While there is no story behind this move, it is hard to deny the strength of the herd.  When we see other people selling en masse, it shakes our confidence and conviction.  Drop far enough and the most resolute bull turns into a sacred bear.  While it is more likely this market will find a bottom in the near-term, we must defend against a larger selloff that takes us further than even the bears expect.

Trading Plan:
Sideways chop is only suitable for day-traders and longer-viewed investors who ignore the volatility.  Intermediate time frame traders are best suited to sit this one out since these failed breakouts and breakdowns cause us to chase our tail and lose money in the process.  If anyone must trade, buy weakness and sell strength.

TSLA daily at end of day

TSLA daily at end of day

INDIVIDUAL STOCKS
TWTR splashed on to the scene with an impressive 73% first day pop.  Since few got the IPO price, the rest of us are left deciding if TWTR is worth more than $20 billion.  At this stage earnings and valuations are meaningless.  This is a momentum stock and will trade according to the whims of the greater fool theory.  For the more practical trader, these IPOs will settle down over the first few weeks and give the bull the opportunity to get in on a valid buy point as it clears the initial IPO consolidation.  Until then, let the gamblers pay in this name.

AAPL had a bad day in sympathy with the broad market and is just above $510.  We will probably dip closer to $500 before finding support.  While support creates a nice entry for the bull, be wary of a dip under $500 and the 50dma.  We only date stocks because invariably they all let us down if we fall in love with them.

TSLA slipped for a second day following earnings and news reports of a 3rd car fire.  The euphoria quickly shifted to concern with the stock down nearly 30% in less than two-months.  The higher they rise, the harder they fall.  If the stock can consolidate around these levels for a couple of weeks, it will likely bounce, but keep this a trade with clearly defined sell points.

Plan your trade; trade your plan

Nov 06

Buy complacency, don’t fear it

By Jani Ziedins | End of Day Analysis

Regular readers of this blog will notice a new tab above this post.  I am excited to announce the launch of a Real-Time Trade Alert service that allows subscribers to follow my trades in real-time.  If you are interested in learning more, click the Real-Time Trade Alerts tab above or follow this link.  For everyone else, have no fear, I intend on keeping the CrackedMarket blog exactly as it is and will continue publishing it free of charge.  

S&P500 daily at end of day

S&P500 daily at end of day

MARKET BEHAVIOR
Stocks climbed modestly and closed within two-points of the record close.

MARKET SENTIMENT
As extended as people claim this market is, it continues hanging in there.  Yesterday morning’s sharp dip to 1755 no doubt seduced bears into shorting the plunge they’ve long been waiting for.  Unfortunately for them, most of those new shorts were forced to cover the rebound and provided a good chunk of the buying that pushed us right back to record levels.

There is a lot of talk about how dangerous the recent wave of complacency is.  But these pundits have it completely and totally backwards.  Complacency is extremely bullish!  Complacent owners are fat, dumb, and happy.  They haven’t a care in the world and zero interest in selling.  Without sellers, supply tightens up, making it extremely easy for prices to rally.

Don’t fear complacency, fear running out of buyers.  This rally will die when people stop buying and not a second sooner.  Quit worrying about how complacent owners are, instead focus on the people stuck outside this rally, looking in.  That is the group that determines the fate of this bull market.  With the large number of traders that bailed during the summer’s Taper, Shutdown, and Default whipsaws, there is plenty of money watching from the sidelines in dumbfounded disbelief.  And this doesn’t even include the ocean of bond money that has been fleeing the jump in rates.  Complacent owners uninterested in selling and a huge pool of money left out of the rally create ideal conditions for a continuation.

TRADING OPPORTUNITIES
Expected Outcome:
The previous commentary is focused on the medium and long-term outlook, as traders we want to know what will happen in coming days and weeks.  I have little doubt there is a cluster of bearish stop-losses just above recent highs and breaching these levels will trigger another short-squeeze.  Since we have only been at these levels for a couple of weeks, don’t expect a huge wave of short-covering and we will see the buying quickly taper.  From there we will likely fall back into the recent trading range as the wider group of prospective investors grows more comfortable with buying the market near record highs.

Alternate Outcome:
The one catalyst that will destroy the growing complacency is a fearful headline that dramatically alters people’s’ expectations of an uneventful grind higher.  Watch for a new uncertainty with the potential to spread like wildfire.   As long as we see it early, we will be out before most realize they should be afraid.

Trading Plan:
The market remains within the recent range between 1740 and 1775.  We should expect market makers to push us above this level in coming days for no other reason than to trigger another wave of short-covering.  But rather than buy the breakout, expect the market to fall back into the trading range.  We covered 130-point over a few weeks and we still need a little more time to consolidate recent gains.  The best trade remains buying weakness and selling strength.

MSFT daily at end of day

MSFT daily at end of day

INDIVIDUAL STOCKS
TWTR is the most talked about new issue since FB.  But FB’s debacle makes it far less likely we will see the same here.  The market was giddy for FB and we all know how that turned out.  This time the market is far more cautious, meaning the stock is unlikely to be overbought in the early days.  I still wouldn’t trade it in the first two weeks, but it will probably head higher over the medium-term.  But that is a trading call, not a fundamental analysis of the company’s future prospects and ability to grow into this outrageous valuation.  And of course we also need to see where it starts trading on Thursday before we can appreciate how much upside remains.

TSLA dipped into the $140s for the first time in nearly three months.  If the stock holds $140, it will likely close today’s gap.  From there it is anyone’s guess if the euphoria returns or reality sets in.  Anyone holding this name needs to have an exit plan because the days of easy buy-and-hold profits are out the window.  Without a clear plan, we are far more susceptible to emotional trading decisions and more often that not that leads to poor trading decisions.

MSFT popped on news of the CEO finalists.  F‘s Mulally is generating the largest amount of buzz.  While some criticize this choice because he is coming from a manufacturing background, that only shows they don’t understand how he turned F around.  He didn’t save F by improving its assembly lines, he saved F by making it cool.  He got rid of the vanilla fleet styling and encouraged designers to take chances.  That is how we ended up with the edgy designed Focus, Taurus, and Explorer.  If he takes over at MSFT, I expect he will instill that same passion as a user and steal a page from AAPL’s playbook, turning MSFT into a cool brand. MSFT has all the right pieces, it just needs a dash of cool to bring the customers back.

Plan your trade; trade your plan