Bridge For Sale

By Jani Ziedins | Intraday Analysis

Nov 11
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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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.

LT November 13, 2013

Wow…what an amazing Wednesday. I almost got my face ripped off. Man, didnt think this market go any higher and it zoomed off at the end of the day. Usually fades but not this time. Wow….!

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