What happened to all the bears?

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?

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.

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.

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