Overly bullish

By Jani Ziedins | End of Day Analysis

Nov 04

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

Stocks made a small move higher, reclaiming some of last week’s equally minor selloff.  We are 0.4% from all-time highs and closed above 1740 for the 10th consecutive session.  Markets that roll over tend to do it fairly quickly.  Holding near the highs this long suggest we still have upside ahead of us.

While it is hard to throw a stone without hitting someone who claims this market is overly bullish, I have a hard time finding all these bulls everyone else keeps talking about.  There was another Yahoo Finance poll over the weekend.  While Bullish easily beat Bearish and Neutral, can we really say 42% is overly bullish?  Does the average guy on the street think stocks are a safe and easy way to make a fortune?  Has everyone already forgotten about the 2008/2009 market crash?

The one thing that makes me confident we are not near the end of this bull market is just how many times a day I hear people say we are at the top.  People still don’t trust this market and these all-time highs terrify them.  Many traders have PTSD and all they see in every chart is another market correction.  Every dip over the last four-and-a-half years has been buyable, yet they still cannot bring themselves to trust a market that goes from the lower left to the upper right.  But that is the secular story, as traders we want to know what will happen next week and next month.

Source: Yahoo Finance 11-04-2013

Source: Yahoo Finance 11-04-2013

Expected Outcome:
Profit takers and short-sellers already leaned into the market over the last two-weeks.  They sold what they were going to sell and the market barely flinched.  That bodes well for a continuation, especially as the newly laid shorts get squeezed as we set yet another new high.  There are no guarantees in the market, but holding above 1740 for two-weeks shows this market is not running out of buyers willing to pay these prices.

Alternate Outcome:
Call a top for long enough and eventually you will be right.  Bears will inevitably be right and they will be right when we least expect it.  Its been a good year in spite of Debt Ceiling I and II, Sequester, Cyprus,  Taper, Shutdowns, and all the other stuff I already forgot about.  But here’s the thing, markets rally in the face of fear and right now we are running short of the stuff.  About the best the critics can come up with is that we are “too high”.  The lack of a meaningful worry means the market is vulnerable to a new obsession sweeping over traders, causing them to hit the panic button.  It might not come next week or next month, but it is coming and we need to be prepared for it.

Trading Plan:
Holding recent gains makes it more likely that the next move is higher.  But at the same time, without a lot of fear left in the market, that means we don’t have much of upside potential either.  At best we have a slow grind higher, at worst we stumble into year-end.  A high probability of modest gains or a low probability of large losses.  Given what a strong year its been, now might be a nice time to lock in gains and coast into year-end.  For those trying to eek out the last few dollars of profit, stay alert and remain nimble.

TSLA daily at end of day

TSLA daily at end of day

TSLA and NFLX roared back after slipping in recent days.  Fear of an imminent broad market top leads many traders to cut their exposure to the highest beta stocks first, and there are few stocks with higher beta than TSLA and NFLX.  Both of these names also suffered a recent bout of CEO’s talking down the stock.  As a momentum investor, I have no idea of such comments will let the air out of these bubbles, but as a fundamental investor, it is really hard to argue with the CEO and founder of both these companies.  If they are concerned, then we might take a hint.  Remember, the goal of this game is to make money, not sell at the top.  The most successful investors often claim the secret to their success is selling too early.  If we want to be more like them, maybe we should take the hint.

TSLA has earnings tomorrow and it is increasingly difficult for the company to surprise bulls to the upside.  Maybe they do it again, one errant comment out of the earnings call like we saw with NFLX and FB and the stock will be down 20-points.

Plan your trade; trade your plan


About the Author

Jani Ziedins (pronounced Ya-nee) is a full-time investor and financial analyst that has successfully traded stocks and options for nearly three decades. He has an undergraduate engineering degree from the Colorado School of Mines and two graduate business degrees from the University of Colorado Denver. His prior professional experience includes engineering at Fortune 500 companies, small business consulting, 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 children.