Buy complacency, don’t fear it

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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.

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