Monthly Archives: December 2013

Pausing or stalling?

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

End of Day Analysis

MARKET BEHAVIOR
Stocks dipped in early trade, but rallied back to breakeven by the close.  We stopped just shy of resistance at 1,810 as buyers were unwilling to chase the market higher for a second day.

MARKET SENTIMENT
Depending on your point of view, either the market took a break following yesterday’s impressive rally, or it stalled as demand dried up.

In this afternoon’s post, I discussed who is sitting out of this market and what it will take to get them back in.  Tonight, I will look at who is already in the market.

Momentum traders are on board this rally.  They learned months ago it is futile second guess this strength since they regretted every dip they sold because it quickly rebounded to new highs.  Last week they said markets will continue higher because of QE.  Now they say we don’t need QE to keep on going.  At this point they  just invent reasons to keep holding.

Paranoid traders who avoided this market because of Fiscal Cliff, Sequester, Obamacare, Contagion, Shut Down, Debt Ceiling, etc no longer have an excuse to not own this market.  Now Taper’s come and gone, there is nothing to fear except being left behind.

It is easy to forget about the buy and hold crowd since they never trade.  They don’t buy much and sell even less, making them mostly a ghost when trying to anticipate near-term market moves.

Most shorts bought with both hands yesterday as they were forced to cover on the strong rebound.  All that are left is the most stubborn shorts who are unlikely to buy back their shorts no matter how high this goes.

An entire herd of former bears are now enthusiastic bulls.  These traders blow with the wind and are the ones who helped us go from 20% bulls a few months ago to nearly 70% now.  As they changed their mind, their buying fueled this rally to all-time highs.  But the remaining 20% bears are a stubborn bunch and we have better shot at getting Bozo the Clown elected president than persuading any of these hardened bears to join the party.

TRADING OPPORTUNITIES
Expected Outcome:
While I respect yesterday’s extremely bullish reversal, I have a hard time getting excited about a market with so few buyers left to keep pushing this rock uphill.  Call me stubborn, early, wrong, or better yet all three, but I simply cannot embracing the market here.  I’ve been a raging bull since the bottom back in November 2012, but there just comes a point when expecting continued strength doesn’t make sense any more.

While the largely meaningless trade of the next couple weeks is unlikely to move the market far, things will get interesting in January, especially once some of the early adopters of this rally pass the 12-month mark and can start locking in long-term capital gains.

Alternate Outcome:
These things go longer and further than anyone expects.  That is clearly the case for this rally that most called a dead cat bounce back in January.  While the ranks of bears and cynics thins by the day, their capitulation buying is what keeps this rally alive.

Trading Plan:
We are coming into year-end and volume will drop dramatically next week.  Low volume allows smaller trades to have a larger impact on prices and we should expect increased volatility.  Maybe we run up, maybe we come down, or maybe we just chop around, but without the big players the market behaves far less predictably.  Buy and hold can sit through it, but the rest of us should consider taking some time off.

Plan your trade; trade your plan

Rest Day

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:43 EDT

Intraday Analysis

MARKET BEHAVIOR
Stocks took a breather this morning following yesterday’s rebound to new highs.  Previous buying stalled at 1,810 and breaking through this barrier will show this rally is ready to continue.  Failing to add to recent gains likely means we will remain within the recent 1,780 to 1,810 trading range into year-end as neither bulls nor bears have the strength to move the market.

MARKET SENTIMENT
Yesterday was fueled in part by a large wave of short-covering as bears were forced to buy the unexpected bounce to new highs.  This strong move also won over many standing on the sidelines because they feared a Taper driven selloff.  With a budget deal in the works and Taper uncertainty behind us, there is no reason left to not own stocks and why the crowd feels so good right now.  But the more comfortable the crowd is, the more nervous we should be.

Quirks arising from supply and demand lead to “irrational” market behavior.  Yesterday saw a huge surge on Taper because no one wanted to sell and buyers were forced to pay a premium to coax owners to sell.  We can say this or that about a fundamental justifications for yesterday’s move, but the simple fact is owners didn’t want to sell and that scarcity drove prices higher.

The initial surge was fueled by short covering and late to the rally buyers, but to keep going the market needs new money to continue buying.  As long as we find a next greater fool willing to buy at even higher prices, all is well.  And that is the big debate.  When fears and uncertainties are few and far between, who does not already own stocks?

We have the chronic worrywarts hiding in bonds.  If they are still reluctant to trust stocks after the market ran up nearly 300% over the last four years, I seriously doubt a two-page policy statement from the Fed will cause them rush into the market with reckless abandon.

Swing traders buy weakness and sell strength.  They are more likely to sell yesterday’s bounce than buy at all time highs.

Value investors are notoriously thrifty and largely avoid buying near all time highs, preferring to wait for more attractive discounts.  These buyers have tons of money, but even more patience.  They are more likely to buy the dip than chase a breakout.

With so few buyers left willing to chase all-time highs, we need to be concerned about demand.  Confident owners and tight supply can mask demand problems for extended periods of time, but there comes a point when even tight supply cannot prop up the market.

TRADING OPPORTUNITIES
Expected Outcome:
The market bounced when it should have sold off.  That is always noteworthy.  But we also need to be cautious of recent volatility since that is a common component of topping patterns.  Obviously there are plenty of people who keep buying this market near all time highs, but with so few excuses to avoid stocks, we are getting close to the point of running out of new buyers.  While we are not there yet, we are getting closer to the dip that won’t bounce.  Until then keep holding, but stand close to the exit.

Alternate Outcome:
The last time the Fed really surprised us was September 18th when it didn’t taper.  The market surged 1.2% to all-time highs on the news, yet that marked the top as we slid into the Shutdown/Debt Ceiling lows.  While we don’t have a clearly identified hurdle in front of us, the market is vulnerable to any negative headline.  With the Taper officially started, bad news is bad again.

TSLA daily at 1:40 EDT

Trading Plan:
Barring an imminent collapse, the market will likely trade flat or modestly higher through the holidays and into the end of the year.  Traders can move to cash and take much deserved time off while others can continue hold through the holidays.  January is the next time the market will fall under the microscope.  Until then its flaws will remain hidden.

INDIVIDUAL STOCKS
While the market is acting strong, AAPL and TSLA are not having the same success.  TSLA is being rejected by the 50dma and AAPL is failing to hold $550.  Stocks go up and stocks go down.  While both of these stocks might be consolidating recent gains and setting the stage for a continuation higher, owners need to have a plan on when they will take profits.

Plan your trade; Trade your plan

Taper rally?

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

End of Day Analysis

MARKET BEHAVIOR
Huge intraday reversal following the Fed’s policy statement that formally launched Tapering, yet pledged to keep interest rates low for years to come.  The day’s range was well over 40-points on 30% above average volume.  Following the initial Taper surge, prices continued ramping into the close as bears were scrambling to buy back their shorts.

MARKET SENTIMENT
The market loves to surprise us.  Few expected a strong performance following a Taper  announcement.  In May we tanked in the year’s biggest sell off on a hint of Taper.  In September we surged when the Fed surprised us by not Tapering.  But today we ramped up even more on the announcement of Taper.  The two most likely explanations are the promise of low-interest rates for as far as the eye can see.  The other is removing uncertainty.  Now the market no longer needs to worry about Taper since we know exactly what the game plan is.

The interest rate justification is a bit fishy since the Fed has long promised to keep interest rates near zero.  The other thing is this move is through conventional means that mostly affect short-term interest rates.  Long-term interest rates will largely be set by the market once the Fed’s bond buying program winds down.  The one potential concern for the market is a material portion of this rally’s success stems from companies buying stock financed through ultra cheap bond issuances.  With increased interest rates on the long end of the curve, companies are less likely to continue buying their stock at the same rates.

Without a doubt actual volatility is ramping up as we keep whipping between 1,780 and 1,810 over the last several weeks, but implied volatility tanked today as demand for options plunged due to today’s strength and the elimination of uncertainty surrounding Taper.  A potential red flag is volatility typically increases at market tops due to the messy power transition between bulls and bears.

Trading Opportunities
Expected Outcome:
While I still don’t trust this market, today’s strength in the face of what should have been a selloff shows this market is standing on firm footing.  Sentiment cannot remain at current levels indefinitely, but so far owners refuse to sell their stocks no matter what the headline.  This confidence keeps supply tight and supports prices.

Alternate Outcome:
While today was not the day the market resets sentiment to more sustainable levels, that day is coming and we need to tread lightly.  The safer the market feels, the more dangerous it is.

Trading Plan:
If the market adds to gains tomorrow, a trader can buy with a stop at 1,810 and cost into year-end.  Those that are already in the market need to grow increasingly cautious and protective of recent gains.  Move up your trailing stops up and remember, the more comfortable you are with your positions, the more nervous you should be.  It is tough to be short given this market’s resilience, but the most bold can short this strength if we fail to add to today’s gains on Thursday.  Use a stop above Wednesday’s highs.

AAPL daily at end of day

INDIVIDUAL STOCKS
AAPL didn’t participate in today’s rebound because China Mobile has not announced the iPhone yet.  Best guess is they are trying to extract better pricing from AAPL.  If China Mobile wins concessions from AAPL, that likely means other carriers will follow.   A couple of years ago AAPL was in the driver’s seat when it had the only smart phone people wanted.  But with Android clones dominating market, AAPL is in a weaker position and phone companies will likely pressure AAPL’s revenues, margins, and earnings.

Plan your trade; trade your plan

To Taper or not to Taper

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:36 EDT

Midday Analysis

MARKET BEHAVIOR
Stocks are modestly lower ahead of the widely anticipated Fed’s policy  statement.  The market is near the lower end of the 1,780 to 1,810 range, while the 50dma is rapidly catching up during this month-long consolidation.  Beyond the moving average, the next level of support is 1,750.

Currently the market is consolidating recent gains, but we need watch out for the next directional move, either a breakout or a breakdown.  Next week is Christmas and we have New Year’s the following week.  If the market holds current levels following the Fed , expect it to coast into year-end on the typical light holiday trade.

MARKET SENTIMENT
Buy the rumor, sell the news, or sell the rumor, buy the news?  Both sides are jockeying ahead of the Taper/no-Taper decision, but since the market is forward-looking, what the Fed does today is less important than what it signals it will do in the future.  At this point today’s Taper/no-Taper is a coin-flip, but most are confident the Fed will come out with more hawkish language that implies the Fed will start winding down monetary stimulus in the near future.  While bulls could get no-Taper today, if the Fed puts in firm language, the market might respond to those forward-looking statements and actually sell no-Taper.

Of course another view is much of this has been dissected to death over recent weeks and the market might coast through this policy statement because it is already priced in.  In that case not much will happen.

Source: Yahoo Finance 12/18/2013

TRADING OPPORTUNITIES
Expected Outcome:
Taper is coming, if not today, soon.  While it won’t be a big deal for the economy, markets and reality rarely intersect.  This is a game of perception and the only thing that matters is what other people think.  If the start of taper fills them with fear and they sell stock at a steep discount, the market will crash.  Given the widespread bullishness reported by many sources, there are plenty of confident holders that can be convert into fearful sellers.

If the market falls on Taper, it is simply creating another dip buying opportunity.  The best profit opportunities arise when others are reluctant and fearful, not when the crowd expects good times as far as the eye can see.

Alternate Outcome:
Recent weakness tempted many bears to short this market.  A surge to new highs will be fueled by these shorts forced to buy back the market as it rolls over them.  Only price pays and it really doesn’t matter how sustainable a move higher is, only that is going up.

Trading Plan:
Expect near-term volatility as news-driven traders jump all over the Taper/no-Taper.  In the past the knee-jerk reaction was often a head fake and the market ultimately moved the other direction.  Don’t buy the pop and don’t short the dip.  Wait for market to calm down before trading the resulting move.

Plan your trade; trade your plan

Hope, Fear, and QE

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

End of Day Analysis

MARKET BEHAVIOR
Stocks gave up five-points Tuesday, failing to hold Monday’s rebound.  The market briefly slipped under 1,780, but recovered this support level by midday.  It is at the lower end of the recent 1,780 to 1,810 range.  Falling under this level will likely lead to further selling, a test of the 50dma, and prior support at 1,750.  If the market holds current levels through the end of this week, it will likely rally in the final weeks of the year.

MARKET SENTIMENT
Fear Taper, hope for no-Taper, or don’t care.  Those are the three attitudes the crowd can take toward the Fed’s policy statement.  The reason we want to gauge sentiment is it is often profitable to take the other side of the trade.  This isn’t because the crowd is “dumb money” but because the crowd’s opinion is already priced in and supply and demand dictates the market will do something else.

If the crowd fears Taper, it will come into the policy statement underweight so it won’t be hurt by the anticipated selloff.  That means most of the selling already happened, making it far easier for the market to rally on the news.

If it hopes for no-Taper, it is holding through recent weakness, expecting the Fed’s non-move will lead to yet another surge in prices.  But since most already own stocks coming into the event, there are few left to buy the news and that lack of demand makes it harder to support current levels.

And finally, if few change their mind based on the Fed statement, the crowd will maintain current positions and the lack of trade will keep up the status quo.

TRADING OPPORTUNITIES
Expected Outcome:
Since there is little fear in the market, it doesn’t seem like the market sold ahead of Wednesday’s policy statement  Without an ample supply of underweight traders to buy the news, it is unlikely we will get a no-Taper pop we’ve seen following past meetings.  And since so few people sold ahead of time, that leaves a large supply of optimistic owners that could easily become nervous sellers.

Alternate Outcome:
A month of sideways trade saw cautious owners lock in profits bears lay on short positions.  These traders are ready-made buyers if the Fed forces them to chase a surge higher.

Trading Plan:
Given bullish sentiment and proximity to all-time highs, the potential for an explosive move higher is limited.  On the other hand, given those same conditions, we are vulnerable to a material selloff if confident owners become fearful sellers.  Nothing shatters confidence like seeing everyone else rush for the exits.  While the high probability is sticking with the up-trend, the potential for a larger move is to the downside.  How a person trades this setup is up to their style, risk appetite, and trading plan.

AAPL daily at end of day

INDIVIDUAL STOCKS
AAPL bulls got an early Christmas present with the China Mobile announcement, but the stock is surprisingly down on the news.  It seems like everyone widely expected it and there was no one left to buy the news.  Now that all the positive catalysts of product refreshes, buybacks, dividend increases, and China Mobile are behind us, what is left to convince people to bid up the stock?  If the story returns to decreasing profits, margins, and market share, this might be a good time to lock in recent profits and wait to buy the stock back at lower levels.

Plan your trade; trade your plan

Churn ahead of the Fed

By Jani Ziedins | Intraday Analysis

S&P500 daily at 2:19 EDT

Midday Update

MARKET BEHAVIOR
Stocks gave up yesterday’s opening gap, briefly falling under 1,780 support.

MARKET SENTIMENT
Monday was the bounce bulls and dip-buyers were hoping for, but they were never able to build on early momentum.  Almost all of the buyable dips this year accelerated following the bounce.  This stalling likely indicates this is not the real buyable bottom.

All eyes are on the two-day Fed meeting, but will the outcome change anyone’s mind?  Will it turn bears into bulls, or bulls into bears?  The only thing that moves prices is when market participants change their mind and alter their portfolio allocations.  That resulting buying and selling is what moves markets.  Will Taper turn bulls into bears?  Will no-Taper turn bears into bulls?

No doubt we will see near-term volatility as short-term traders try to game the headlines coming out of the FOMC meeting tomorrow, but after that passes, expect the market to return to its previous trajectory.  Since the Thanksgiving high, buying stalled as few are enthusiastically buying these new highs.  The last couple months has seen a dramatic shift from 20% bulls to 60% bulls.  Converting cynics into buyers fueled the 150-point surge off the October lows, but with so few cynics left to convert, we might be running into demand problems.

TRADING OPPORTUNITIES
Expected Outcome:
The challenge for bulls is yesterday’s pop pulled a portion of the no-Taper buying forward, meaning there will be fewer left to buy the news when it comes out Wednesday.  Today’s weakness shows many are not willing to follow the dip-buyer into this trade.  Maybe they don’t believe it, or maybe they are already in the trade and don’t have extra money to buy more.  The challenge is when so many people already believe in a move, there are few left to keep pushing prices higher.

Alternate Outcome:
The last few weeks of churn removed some of the market’s recent excess, setting the stage for a continuation.  Sentiment can remain at bullish extremes for extended periods of time and is a secondary indicator.  When in doubt stick with the trend and in spite of modest weakness, the market is still in an uptrend.

Trading Plan:
Now we simply wait and see what the Fed has to say and trade the resulting move.  Given the high level of bullishness already in the market, there is not a lot of explosive upside in the market.  On the other hand, we are vulnerable to a herd selloff if the crowd loses its nerve.  While the high probability trade might be higher, the bigger move potential is lower.  Trade those conditions according to your style, risk tolerance, and plan.

Plan your trade; trade your plan

Market bounce

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

MARKET BEHAVIOR
Stocks reclaimed 1,780 in early trade and held this level through the close.  Volume was higher than Friday, but still below average.  The market is inside of the 1,780 to 1,810 trading range still holding above the 50dma.

MARKET SENTIMENT
The talking heads are going round and round over whether the Fed will announce a reduction in QE on Wednesday.  Some say yes, most say no, but the consensus is the Fed will come out with strong language preparing the market for a slow withdrawal of fiscal stimulus in coming months.

Today’s rebound started strong, but failed to add to early gains and settled 5-point off the early highs.  Many traders are simply waiting for the Fed’s policy statement before adjusting their positions.  No doubt if there is a post-Fed pop, today’s strength brought some of that buying forward and makes an explosive move higher less likely.

TRADING OPPORTUNITIES
Expected Outcome:
The market remains in no man’s land, stuck between,780 to 1,810.  At this point it is a coin-flip if we get Taper.  The consensus seems to expect no Taper, so it is likely priced in.  We could get a short-lived bounce as news driven traders chase the move, but expect the market to quickly return the previous state.  Over the last couple weeks, the market has a couple lower-lows and lower-highs following the Thanksgiving all-time high.  Since then traders have been reluctant to buy near the highs and the market drifted lower on light demand.  (heavy selling is accompanied by above average volume)  Unless the market is shocked by good news out of the Fed, expect the light-volume drift lower to continue after the Fed induced volatility passes.

Alternate Outcome:
The market made it most of the way to the 50dma and often we don’t need more than that before refreshing the rally.  Without a scary headline, holders don’t have a reason to sell and are happy to own stock at these levels.  As long as they refuse to sell into weakness, supply will remain tight and it will be easy for the market to bounce on modest demand.

Trading Plan:
So close to the Fed statement, it is a bit late to put on a trade.  It is a binary trade and little more than a coin-flip, so the conservative approach is to trade the resulting move.  The most likely outcome seems to be an initial pop as the Fed kicks the can down the road, followed by weakness as most already expected this move and bought in anticipation.  Failing to hold 1,780 is sortable and surging above 1,800 is buyable.

Plan your trade; trade your plan

Bulls attempt a rebound

By Jani Ziedins | Intraday Analysis

S&P500 daily at 2:37 EDT

MARKET BEHAVIOR
Stocks ran up on the heels of the European market’s strength.  We reclaimed prior support at 1,780 and traded as high as 1,790, but the market slipped midday as buying paused.

MARKET SENTIMENT
This was the bounce bulls were waiting for.  The Fed’s meeting starts tomorrow and some of this buying is in anticipation of the “No Taper” surge to new highs.  But if excited bulls are buying the rumor, how many will be left to buy the news?

While everyone is debating “to Taper or not to Taper”, we should really be asking if it matters.  Given the trillions of dollars in bonds the Fed already owns, will dialing it back by $10 billion really make much of a difference to either the Fed’s balance sheet or the broader economy?  Yet it is all anyone is talking about.  The bulk of the debate revolves around taper now or early next year.  Again, this is a relatively small numbers and it won’t make much difference either way, but markets trade emotion, not common sense.  While the economic nuances of Taper policy don’t matter that much, the crowd’s reaction is what we are trying to anticipate.

Whether they Taper this week or hold off a month or two, there is a lot of pressure on the Fed to dial back its monetary intervention, both externally and internally.  Even if the Fed delays Taper, expect the language to firm up as the Fed prepares the market for the inevitable withdrawal of QE.  Bulls might get the “No Taper” they are hoping for, but if the language is hawkish, that could temper enthusiasm.

TRADING OPPORTUNITIES
Expected Outcome:
Markets remain more bullish than they’ve been in years.  While this condition can persist for an extended period of time, it is riskier to own stocks here than at any other point in the last two years.  Since no one knows for sure what the future holds, the best we can do is play the odds and anyone buying this rally is late to the party.  The best buying opportunities arise when everyone is nervous and fearful.  That is clearly not the case here as the crowd widely expects the good times to continue.

While Taper/No-Taper is a coin-flip at this point, we need to evaluate the potential moves in either direction before deciding how to trade.  The market is only 1.5% off all-time highs and 7% above the 200dma.  Given the strong run and the already bullish sentiment, it is hard to imagine a huge upside surprise given how much optimism is already priced in.  On the other hand, markets go up and markets go down.  It’s a year since we last tested the 200dma and it wouldn’t take much of a headline to trip up the market given current expectations.

Alternate Outcome:
The sideways churn between 1,780 and 1,810 saw a lot of owners move to cash.  While not a dramatic move lower, holding these levels for a few weeks allows the market to cool off, making another leg higher more sustainable.

Trading Plan:
The market is in the middle of the recent trading range ahead of the Fed meeting and there is not a lot to do here other than wait for the market to show its hand.  Dipping under the 50dma in coming days is clearly bearish and launching through 1,800 is bullish.  Until then we are all spectators.  I have a bearish bias given the bullish shift in sentiment, but this could go either way.

PLan your trade; trade your plan

Still no dip buying

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

End of Day Analysis

MARKET BEHAVIOR
Stocks slipped for a third straight day, undercutting recent support at 1,780.  The next technical level is 1,760 and the 50dma.

MARKET SENTIMENT
Volume was surprisingly light for a second day as a wave of fear and panic selling failed to hit the market.  While this orderly selling can be bullish because it shows most holders are confident and unwilling to sell modest weakness, it also means there is a huge amount of potential selling still hanging over the market if fear and panic take hold.  Since trading volume is near average, it shows sellers are not showing up in droves and this weakness is primarily caused by a lack of demand as dip buyers remain MIA.  Is this because they are waiting for more attractive prices, or more worrisome, we are running out of new buyers willing to prop up the market near all-time highs.

TRADING OPPORTUNITIES
Expected Outcome:
At this point the near-term trend is down since we were unable to hold support at 1,800 Wednesday and 1,780 Thursday.  Low-volume selling indicates we are nowhere near capitulation and there is plenty of downside potential if the herd gets spooked and rushes for the exits. The next level to watch is 1,760 and the 50dma.  Where we go from there largely depends on how emotional traders become.  If they remain calm and collected, expect more selling.  This market is stalling on over bullishness and we need to reset sentiment before the rally can resume.

Alternate Outcome:
This dip will bounce at some point because they always do, the only debate is how low we go first.  We’ve seen a lot of distribution over the last three weeks with 12 of the last 18 days finishing in the red.  Anyone selling at the top has plenty of cash to buy the dip when it reaches an attractive level.  Recently we have been bouncing sooner and sooner and could very well could be on the verge of yet another rebound to new highs.  The key is reclaiming support at 1,780 and 1,800.  With the market so perfectly setup to selloff, if bears cannot get the job done, they show they are powerless to hold this rally back.

Trading Plan:
The new lines in the sand are 1,780 above and 1,760 below.  Reclaiming 1,780 shows buyers are finally stepping up to defend this rally.  Falling under 1,760 could finally trigger that high-volume wave of capitulation selling as confident owners turn into fearful sellers.  So far nothing indicates this move is more than a routine pullback to support, but given how much potential selling is still out there, things could get ugly in a hurry if fear takes over.

Plan your trade; trade your plan

Three in a row

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:15 EDT

Intraday Update

MARKET BEHAVIOR
Stocks slipped for a second day, undercutting support at 1,780.  If today’s losses hold, that makes eight out of the last ten sessions ending the red, a dramatic reversal from all the buying we’ve seen in recent months.  The next material level of support is 1,760 and the 50dma.

MARKET SENTIMENT
While we’ve held near all-time highs in recent weeks, there was a clear undercurrent of distribution taking place under our noses.  Eight of the last ten and twelve out of the last eighteen sessions finished lower.  The losses have been so minor that bulls could easily ignore the distribution, but violating support this morning makes this phenomena harder to hide from.

Dip buyers remain MIA.  Wednesday they failed to defend 1,800 and today they allowed us to slip through 1,780.  The saving grace is today’s violation of 1,780 didn’t trigger a free fall selloff as many owners chose to wait for the “inevitable” bounce rather than sell a dip under some “arbitrary” technical level.  And this isn’t surprising.  Every other bout of weakness this year ended in a powerful rebound to new highs and regretful sellers learned to be more patient next time.  While this strategy worked every other time this year, we inevitably come to a dip that doesn’t bounce.  It is too early to say this is the end, but the lack of urgent selling likely means we haven’t hit bottom yet.

TRADING OPPORTUNITIES
Expected Outcome:
The crowd was wrong about “Sell in May” and they avoided September and October because that’s when markets crash.  But now they are waiting for the Santa Clause rally.  Will conventional wisdom end the year oh and three?  If the success in the market was as simple as following a few catchy phrases, preschoolers could beat the market.

Dip buyers need to come in and prop up the market, until then assume buyers are scarce and selling will continue.

Alternate Outcome:
The best time to buy is when everyone else is convinced we are headed lower.  Violating support this morning flushed out anyone with stop-losses.  Once that selling runs its course, supply will dry up and we will bounce yet again.

Trading Plan:
Stick with what is working.  The market is selling off without urgency and these things typically end on an emotional climax, something we have not reached yet.  Bullishness it near historic highs and we need a dramatic move to reset sentiment to more sustainable levels.  While we will eventually reach a buyable bottom, there is no reason to buy prematurely.  Wait for this move to run its course and buy the resulting strength.

Plan your trade; trade your plan

Time to get out?

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

End of Day Analysis

MARKET BEHAVIOR
It was a bloody day in the markets as we gave back all of Friday’s employment pop.  The market is a couple of points above support at 1,780 and a dip under this level will trigger a second wave of stop-loss selling.  The market remains comfortably above the 50dma, but we will likely test this level if we cannot hold 1,780.

MARKET SENTIMENT
The question on everyone’s’ mind this afternoon was “buy the dip or sell before it is too late?”  This selloff roiled the calm ride we’ve had to this point.  This is far from a crash but it did serve as a wake up call for many traders.

Volume was only 7% above average, showing an orderly selloff without much panic.  This tells us the decline was more a function of buyers not showing up than a mass rush for the exits.  Like everything in the markets, there are two ways to read this.  The bullish view is confident owners don’t sell weakness and the market will quickly bounce on the lack of shares available for sale.  The bear’s counter argument is we haven’t seen the real wave of emotional selling hit the market yet.

For the first eleven months of the year I believed in the bulls argument that confident owners keep supply tight and prop up prices.  But given the dramatic shift in sentiment and churn in ownership from value oriented dip buyers to momentum chasers, I no longer have confidence in the resolve of owners to keep holding in the face of weakness.  These are buyers who rushed to the market once the coast was free of doom and gloom headlines.  These new, fair-weather owners are likely to be scared by their own shadow their selling will pressure markets.

TRADING OPPORTUNITIES
Expected Outcome:
It doesn’t feel like the dip is done.  The low volume selling shows we haven’t hit the emotional capitulation that often signals a bottom.  We will likely break support at 1,780 on Thursday and that stop-loss selling will trigger another leg lower.  The next stop from there will be the 50dma.  After that it largely depends on traders emotions.  Will confident owners keep holding and end the selloff?  Or will headlines screaming Taper cause many to throw out all their carefully laid plans and allow the herd selling destroys their resolve?

Alternate Outcome:
Every other dip this year felt like the real thing, why is this one any different?  We dip a couple percent, everyone gets all worked up, selling exhausts itself, and we make new highs a week later.  While this pattern cannot continue forever, its been the best trade of the year.

Trading Plan:
While we might see a modest bounce in the morning as dip-buyers try to defend 1,780, expect a fresh wave of selling to hit the market if this support level doesn’t hold.  How each trader responds to this move largely depends on their timeframe.  Nimble swing traders can short this violation of support with a stop above 1,780.  Intermediate-term traders looking to buy the dip should wait for lower prices.  Longer-viewed traders need to get ready to buy their favorite stocks when emotional owners are selling them at steep discounts.

While I expect further selling, the one thing that will turn me into a buyer is if we slip under 1,780 but bounce back decisively.  Failing to trigger another leg lower after breaking support shows the selling exhausted itself and this is yet another dip buying opportunity.

Plan your trade; trade your plan

Where are the dip buyers?

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:22 EDT

Intraday Update

MARKET BEHAVIOR
This morning’s selloff wiped out all of last Friday’s employment bounce.  We slipped under support at 1,800 in early trade and its been all downhill since then.  The next meaningful support level is 1,780.  Failing to hold that likely means a trip back to 1,760 and the 50dma.

MARKET SENTIMENT
Dip-buyers are MIA.  Either they are sitting on their hands waiting for even better prices, or we ran out of them and this slide will continue until we reach levels far more thrifty value investors cannot resist.

The news is fairly benign and we don’t have a major headline event driving this selling.  We simply ran out of new buyers willing to chase stocks at all time highs.  This happens from time to time and why buying stocks when everyone is fearful is typically a better strategy than waiting until the coast is clear.  Regardless of how we feel, stocks have never been riskier as we marched to new all-time highs.  That is the great paradox of the market, the higher prices go, the safe we feel, the more risk we are exposed to.  There are plenty of great times to buy breakouts and hold stocks making new highs, but that is when we still have fear and cynicism to feed off of.  Since the budget deal in October, there has been little to worry about and most investors forgot their reluctance and finally embraced this market with open arms.  But as soon as everyone finishes packing their accounts full of stocks, we run out of new buyers to keep pushing prices higher.

While it is premature to call this a top, buying definitely stalled.  Between stronger than expected employment numbers last Friday and a new longer-term budget solutions in DC on the table, we should be higher, not lower.  Some will attribute this to renewed expectations of Taper, but never forget prices move on supply and demand, not fundamentals or technicals.  We simply ran out of new buyers willing to throw their money at the market and are selling off as a result.

The challenge for bulls is this third pullback under 1790 is making many current owners and prospective buyers nervous.  With so many bullish on stocks, that leaves us with a huge pool of potential sellers.  Few buyers and lots of potential sellers is rarely a good combination for stock prices.

TRADING OPPORTUNITIES
Expected Outcome:
Failing to capitalize on recent good news shows buying is stalling and we need to tread lightly.  The key levels to watch are 1,800 and 1,780.  Bouncing and retaking 1,800 shows demand is alive and well.  Slip under 1,780 and it will trigger a wave of stop-loss selling, pushing us down to 1,760 and the 50dma.  From there it will be a matter of seeing if that is low enough to trigger a counterbalancing surge of value oriented dip-buying.

Alternate Outcome:
Over the last 12-months owners have been conditioned to hold through any and all weakness because it always ends in a bounce.  This makes it far more difficult for weakness to shake supply free.  That lack of selling makes it easier for modest dip-buying to prop up the market and has been the foundations this 25% year was built on.  Markets go down when supply swamps demand and as long as owners keep their cool, supply will remain constrained.

Trading Plan:
Shorts can take a shot at this weakness with a stop above 1,800.  Buyers are best served waiting until the market regains 1,800 because it is better to be a little late than a lot early.  Owners need to decide how much pain they can tolerate.  Shorter duration traders should have already locked in gains.  Long-term traders should ignoring these fluctuations and use any weakness as a buying opportunity.

Plan your trade; trade your plan

Testing 1,800 again

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

MARKET BEHAVIOR
Stocks slipped in modest trade as buyers took a break.  We remain near the upper end of the recent 1,780 to 1,810 trading range and barring any major headlines, we will likely bounce around these levels as the market consolidates recent gains.

MARKET SENTIMENT
It is not unusual for the market to cool off after Friday’s strong rebound and the previous 150-point run from the October lows.  While it is easy to grow enthusiastic following such strong moves, rationally we acknowledge that every day cannot be an up-day.  But is this just cooling off or hinting at far more insidious stalling?

Last Friday’s better than expected employment report erased a five-day losing streak, but since then buying has been fairly tepid.  Yesterday the market failed to punch through 1,811 three different times.  Market makers and HFTs love pushing us to new highs because that often triggers a short squeeze and stimulates trading that puts money in their pockets.  But if they didn’t have the strength to push us those last few points, we have to wonder if this latest rebound is already running out of gas.

Sentiment swung dramatically from the depths of the Budget Crisis and most measures of sentiment are near historical highs.  While these conditions can persist for long stretches of time, it does suggest upside is more limited if the crowd already embraced this market and is fully invested.  We need new buyers to keep pushing prices higher.

TRADING OPPORTUNITIES
Expected Outcome:
Previously 1,800 acted as support and it will be insightful to watch how the market responds now that we are just a couple of points above this support.  Do we bounce off it as the good times roll, or does last week’s slow-motion slide continue as we dip back into the 1,700s?  Supposedly our politicians are coming together around a budget deal, but if that good news fails to excite the market, that likely means most of the good news is already priced in and more selling is likely.

Don’t buy any of the chatter about bubbles, crashes, and the such.  Markets go up and markets go down.  It is as simple as that.  Don’t read too much into these periodic step back.

Alternate Outcome:
Bouncing off of 1,800 and setting new highs will prove there is still plenty of demand for this market at these prices and there is little else to do but hang on and enjoy the ride.

Trading Plan:
If the market is in a trading range, expect near-term weakness.  1,780 is an important level because we bounced off it and a large pile of stop-losses are littered under this level.  Slip under and it will likely set off a wave of selling and push us down to the 50dma.  If we bounce off 1,800 and make new highs, this rally is not ready to take a break.

Plan your trade; trade your plan

Don’t Worry, Be Happy

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

End of Day Analysis

MARKET BEHAVIOR
Stocks continued Friday’s strength and climbed three-points to finish at 1,808, setting a new closing high.  So far the market remains at the upper end of the recent trading range between 1,780 to 1,810 as it consolidates gains.  Are we about to hit our head on the upper end of this range, or breakout?  The market will let us know as early as Tuesday.

MARKET SENTIMENT
Friday’s stronger than expected employment report continues the “no worries” theme.  Traders no longer fret over impending doom and gloom the way they did through the first 10-months of the year.  We gradually eliminated all the major risk factors, including Fiscal Cliff, Sequester, Default, European Contagion, Shutdown, and Taper.  The market rallied strongly as these terrifying headlines turned into non-issues.  More evidence that buying when other people are fearful is a very profitable strategy.

But what happens to a rally that thrives on fear, runs out of fear?  So far momentum is continuing our ascent higher, but we must always ask ourselves who is the next  buyer?  Earlier in the year we had a plethora of money sitting on the sidelines in anticipation of the widely expected correction that never came.  As we conquered every risk thrown our way, reluctant money’s fear of a correction was replaced with a fear of being left behind.

It took a while, but the crowd finally embraced this market.  This is in stark contrast to this time last year when everyone was convinced the Fiscal Cliff was going to annihilate our fragile economy.  With hindsight as our guide, it is painfully obvious what a fantastic buying opportunity that was, but what about now?  Is it too easy to buy here?  Should that alone make us fearful?

TRADING OPPORTUNITIES
Expected Outcome:
When in doubt, stick with the trend.  That has been the right call all year and more recently we keep bouncing back from even the most benign dips.  Last week we were down an almost trivial two-percent from the highs before the employment rebound pushed us right back to record highs.  The question is if there are enough chasers left to continue buying these highs, or if last week’s five-day slide is a material sign of flagging demand.    While the economy is chugging along, markets rarely respond to fundamentals in obvious ways.  That would be too easy and we all know the market is anything but easy.

Alternate Outcome:
If I had a dollar for every time I heard someone say this market’s gone too far.  Those guys were forced to eat their words, so what makes this time any different?  If picking tops were easy, we’d all be hanging out on the beach in some tropical destination drinking ice-cold beverages instead of huddling around space heaters trying to survive this cold spell.

Trading Plan:
With so little fear remaining in the market, the probability of an explosive move higher is greatly diminished.  That leaves two options, a sideways grind higher, or the selloff everyone’s been waiting for.  We are quickly establishing a trading range between 1780 and 1810.  Since we are at the upper end of this range, look for recent strength to stall.  Depending on how dip-buyers respond, we could bounce at 1800, or slip to 1780.  Recent weakness set a floor at 1780 and many traders will use this level as a stop-loss.  Breaking through will trigger a wave of selling and we will quickly test the 50dma.  If we bounce, it becomes another routine dip-buying opportunity.

Plan your trade; trade your plan

Employment saves the day

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

MARKET BEHAVIOR
Stocks recovered two-thirds of recent losses on Friday following a stronger than expected employment report.  We gapped higher at the open and held these gains through the close.  Reclaiming prior support at 1,800 is a big win for the rally and the market is establishing a trading range between 1,780 and 1,810.

MARKET SENTIMENT
Bulls are breathing a sigh of relief as this employment report snaps a five-day losing streak.  While the modest selloff made holders uneasy, it wasn’t deep enough to convince a large number of them to dump their shares.  Much of the recent selling was likely bears shorting the weakness and Friday’s strength forced many of them to buy back those shorts for a loss.  Short-squeezes are strong, yet temporary and the bigger question following Friday’s rebound is if this strength will attract a sustainable wave of new buyers to the market.

With bullish sentiment at levels we haven’t seen in years, it is hard to get excited about owning this market.  The challenge of trading sentiment is it is just as hard to pick a top in sentiment as it is to pick a top in the market.  While sentiment doesn’t give us a timing signal, it does provide insight into how large resulting moves might be.

Stocks only move when people change their minds.  This is when they adjust their portfolio to reflect their new outlook and the resulting buying and selling moves prices.  The problem with widespread bullish sentiment is there are fewer people remaining to convert to buyers and that limits the potential upside.  On the other hand, a huge crowd of bulls creates an ample supply of prospective sellers.  While we can continue higher as we attract the last of the holdouts, there is far more risk of a large downside move simply because of how crowded the bull side has become in recent weeks.

TRADING OPPORTUNITIES
Expected Outcome:
Trends are more likely to continue than reverse, but the larger potential move is to the downside.  How each person trades this is up to them.  Someone swinging for the fences will short the market since that is where the biggest pile of money is.  Someone happy with small gains will continue squeezing nickels and dimes out of the rally.

Alternate Outcome:
Treasuries keep falling in price, chasing many out of that market and they need to find a place to park their money.  Given what a great year it’s been for equities, many will be tempted to chase this strength.  Their buying can continue pushing us longer and higher than anyone imagines.

Trading Plan:
The market is consolidating in the 1780 to 1810 range.  We can buy the weakness and sell the strength until the next directional trade breaks out or breaks down.

Plan your trade; trade your plan

Five in a Row

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

End of Day Analysis

MARKET BEHAVIOR
Stocks slipped for a fifth consecutive day.  While that sounds worrisome, the declines are measured in tenths of a percent and after all that selling we are only 1.5% from all-time highs.

MARKET SENTIMENT
While the seemingly chronic weakness is weighing on the market’s spirit, it has not been enough to convince most traders to change their outlook or positions.  They keep holding in anticipation of the expected bounce and the selling has been so mild it isn’t applying pressure to holders.  Markets refresh after strong runs by flushing out the excess.  So far these five days have not provided us with a meaningful flush that forces weak hands from the market.  While we can bounce to new highs at any time, failing to reset the giddy sentiment will prevent it from being a meaningful and sustained move higher.

Friday morning brings the November jobs report.  The market was blown away by October’s unexpected strength in the face of the Gov’t shutdown and this week’s ADP numbers were also stronger than expected.  Both of these prior beats lay the framework for high expectations.  The challenge for bulls is finding their Goldilocks number.  Too high and it threatens easy money.  Too low and it signals economic weakness.  But what happens if we slip perfectly between these two landmines?  Do we surge higher, or are the raised expectations already priced in and there is little upside remaining.  Potentially we face a no-win situation if we run into a sell-the-news even if employment hits the sweet spot.  Too highs and traders sell, too low and traders sell, and just right, no one buys.  While this hypothetical is a bit exaggerated, it sure seems like there are more reasons to go down than up and that skew creates a trading opportunity.

TRADING OPPORTUNITIES
Expected Outcome:
Today’s failed follow through on the heels of yesterday’s impressive intraday bounce reveals cracks in the rally.  Every other time this year a strong reversal would leaded to a sustained move higher.  This time buyers are either waiting for more attractive levels or we exhausted the supply of new money.  While it is always risky to go against the trend, today’s weak trade following yesterday’s strong rebound signals a potential change in character.

Alternate Outcome:
The market hates being predictable and buying the dip is getting way too easy.  While the market could continue higher, it wants to convince everyone it is going lower first.  That means continued weakness until most bulls give up and most bears get cocky.  Only after that reversal in sentiment will prices bounce back with a vengeance.  The market moves on its schedule and it is often more patient than the rest of us.

Trading Plan:
As long as we remain under 1800, we need to be cautious.  Owners can lock in profits and dip-buyers should sit on their hands.  Wait for the market to prove itself by reclaiming and holding 1800 before jumping back in.  While we could pop above this support level soon after the jobs report, wait to see if the gains hold before chasing.  On the other side, bears can use any weakness to add shorts while keeping a tight stop above 1,800.

AAPL daily at end of day

INDIVIDUAL STOCKS
All the good news is out for AAPL. We have new iPhones and iPads in time for Christmas and AAPL bulls got an early present with the leak that China Mobile will start selling the iPhone in coming weeks.  This was the most anticipated announcement all year, yet the stock closed up less than $3.  A good rule of thumb for retail investors, if you know something, then it is likely everyone else also knows it and it is already priced into the stock.  Today’s non move on the China Mobile headline is more indicative of a buy the rumor, sell the news trade and any owners should move up their trailing stops.

TSLA is consolidating recent gains following the German stamp of approval on the car’s batteries.  Any broad market weakness will likely hit this stock doubly hard, so it is still a no-touch until both the market and stock prove they are ready to continue higher.  For TSLA that means clearing the 50dma.

Plan your trade; trade your plan

Nickels and Dimes

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:15 EDT

MARKET BEHAVIOR
The slow grind lower continues for a fifth day as the market gave up an almost trivial three-points in early trade.

MARKET SENTIMENT
Five days of selling that only manages a 1.5% decline from all-time highs is hardly worth paying attention to, but maybe that is the plan.  The market might try to lull us to sleep before it robs us blind.

There are two kinds of market declines, the spectacular crashes that take everyone’s breath away, leaving us paralyzed with fear and indecision.  The other is a painfully boring slide that chips away nickels and dimes under our nose.  We all know the market is imploding when we wake up one morning and a huge chunk of our portfolio is missing, but when we slip a few points here and there, no one seems pay too much attention.  These are the losses we can easily rationalize away because no one is afraid of 0.1% and 0.2% declines.

But the thing is the slow-moving selloff tend to last longer and do more damage than their faster moving cousins.  Everyone remembers the Financial Meltdown that crippled global markets in the Fall of 2008, but many forget the market had already been selling off for a full year prior to the crash.  Drop five percent in a day and it is headline news.  Drop five percent over two months and no one notices.

TRADING OPPORTUNITIES
Expected Outcome:
The 1.5% dip from all-time highs doesn’t seem to be enough to attract a new wave of dip-buyers and we continue languishing under 1,800.  Sometimes holding near new highs supports recent price gains, other times it signals dwindling demand.  Most stock owners have been conditioned to continue holding weakness because every time they sold, they came to regret that decision as the market quickly rebounded to new highs.  That attitude is keeping supply tight and supporting prices as owners refuse to sell the weakness.  But we also need to worry about the other half of the equation, demand.  With as optimistic as the market’s become in recent weeks, many of the people who wanted to buy this market already have. Without a supply of fearful holdouts to convert into buyers, it is less clear who will fund the next leg higher.

Alternate Outcome:
Markets consolidate gains one of two ways, the first is pulling back, the second is trading sideways for extended periods.  While it seems likely this market will reconnect with the 50dma in coming weeks, it could do that by simply staying at these levels and letting the moving average catch up to it.

Trading Plan:
There is a little something for everyone.  A bear can short the market with a stop above 1800.  A bull can continue holding with a stop under  1,780.  For the person out of the market looking to get in, wait until we reclaim 1,800 before buying.  It is better to be a little late than a lot early given all the clear air under the market.

Plan your trade; trade your plan

A wild ride to nowhere

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

MARKET BEHAVIOR
A wild ride to nowhere.  Gap 10-points lower at the open, surge 15-points an hour later, collapse 20-points a few hours after that, only to reclaim another 15 just before the close.  If anyone is keeping track that, there was more than 60-points of up and down through the day, easily the wildest ride in quite some time.  But for all that amazing volatility, we finished down a trivial 2-points!

MARKET SENTIMENT
There was a little something for everyone in today’s trade.  For bears, tops are often volatile as the battle between bulls and bears heats up.  This is because previously dominant bulls start losing their grip on power and bears are finally able to put up a competitive fight.  Today’s back and forth certainly qualifies as a competitive fight.  For bulls, everything was clearly going the bears way when we slipped under 1,780, yet they couldn’t hold that ground as a wave of dip-buying bowled them over.

Markets often break down faster than they climb.  There are plenty of human and crowd psychology reasons for that, but what is important is bears had a golden opportunity to break this market wide open, but they just couldn’t get it done.  That clearly shows buyers are not rolling over here and they still have sufficient strength to defend these levels, at least for the time being.

While today’s rebound is impressive, it is hard to be bullish when everyone else is.  Investor Intelligence bullish readings are near 5-year highs (57.1%) and bearish levels are setting new 5-year lows (14.3%).  While these readings don’t give us definitive trading signals, they indicate an imbalance that will invariably swing back the other way at some point.  Maybe it won’t be tomorrow, next week, or next month, but it is coming and that makes it hard to get comfortable with these levels.

TRADING OPPORTUNITIES
Expected Outcome:
Markets decline for one of two reasons.  The more obvious is unexpected bad news causes investors to lower their expectations of the future and thus the price they are willing to pay for stocks.  The second is running out of new buyers because the crowd is extremely bullish and everyone who believes in the rally already owns all the stock they can hold.  While the first case leads to a terrifying and breathtaking plunge, the second scenario sneaks up on us as we slip lower without raising alarms.  Since current worries are few and far between, we can discount the imminent plunge and instead need to be watchful of the benign grind lower.  While it is clearly premature to be talking about a correction 1% from all-time highs, with so many bulls already in the market, it is hard to figure out who the next greater fool is.

Alternate Outcome:
When in doubt, stick with the trend.  So far we have seen little concrete data or technical behavior to suggest this market is running out of gas.  Even if we pullback for a few days, all that does is shake free weak owners who will soon be forced to chase this market as it continues higher without them.  Reclaiming 1,800 and setting new highs above 1,813 will go a long way to showing this rally still has legs.

Trading Plan:
The market is at a critical juncture.  Either we bounce or we don’t.  It is hard to be more clear than that.  Failing to reclaim 1,800 shows buyers are becoming scarce and a test of the 50dma is likely.  On the other side, another humiliating defeat of bears at 1,780 likely means we have new highs in the near future.  Trade each of these scenarios according to your outlook, but keep stops close incase the market doesn’t respond as expected.

INDIVIDUAL STOCKS
The WSJ is reporting AAPL finally landed China Mobile, something AAPL bulls have been eagerly waiting for.  Now that it is finally here, we get to see how much of this news is actually priced in the stock.  While we will no doubt see a strong reaction to the news, the more meaningful trade will occur after the initial excitement settles down.  Will the stock keep adding to those early gains, or is this a buy the rumor, sell the news event?  If we see a nice pop, it would be hard not to take profits off the table given how far the stock’s come in recent months.  This is not unexpected news, so it is unlikely it will cause a lot of investors to change their mind about the stock.  Those that were bullish before this news will remain bullish, and most bears are bears for reasons unrelated to China Mobile and equally unlikely to change their outlook.

Plan your trade; trade your plan

Volatility increases

By Jani Ziedins | Intraday Analysis

S&P500 daily at 2:18 EDT

MARKET BEHAVIOR
A wild ride this morning as we gapped lower, surged higher, and then plunged under the early lows by midafternoon.

MARKET SENTIMENT
Volatility is often a sign of shifting trend as many stubbornly continue trading what has been working, but their declining numbers mean they don’t hold the same sway over the market.  For the last 12-months every dip has been buyable.  While most resisted buying the dips in the first half of the year because they expected a pullback, now everyone is buying the dips because that has become the most obvious trade.  But what happens when everyone starts buying the dips?  After a while the crowd ends up fully invested and there is no one left to buy.

The last few months has seen a dramatic shift in sentiment as we went from countless headlines of doom and gloom to a complete lack of fear.  Markets move when people change their mind and as people warmed up to the market, their buying pushed us to all-time highs.  Now that we are at a point where everyone feels pretty good, there are fewer bears left to convert to bulls.  That means price gains will slow down.  Even more worrisome is this new, large pool of bulls is ripe to change their minds their selling will push us lower.

While sentiment is not an exact science, it gives us insight into probabilities for a move.  While we can easily continue making new highs, the large shift in sentiment makes us vulnerable to a pullback.  While we cannot use this as a timing signal, it gives us an idea of the actual risk/reward of owning the market.

TRADING OPPORTUNITIES
Expected Outcome:
Fear and uncertainty is only just starting to creep back into the market.  By nature the market is a fearful creature and the last six weeks has been unnatural.  Nothing brings fear back into the market like sliding stock prices.  It really doesn’t matter what reason people attach to it, they are simply trying to rationalize what is nothing more than the laws of supply and demand taking over.  While it seems likely we are destined test the 50dma in coming weeks, it won’t be a smooth ride and expect the choppy volatility to continue.

Alternate Outcome:
Every dip is buyable until it isn’t.  We are only 1.5% from all time highs and it is certainly premature to be calling a top.  Every dip purges excess from the markets and this choppiness might be all we need to refresh the market and set the stage for the next leg higher.  If the market recovers recent losses, that shows dip-buyers are alive and well.

Trading Plan:
Given the large shift in sentiment recently, it is hard to justify the risk/reward of buying such a minor dip.  Let this move play out and we will likely get the opportunity to buy at even more attractive levels in coming weeks.

Plan your trade; trade your plan

Time to cool off?

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

MARKET BEHAVIOR
Stocks opened under 1,800 and failed to reclaim this nice round support level by the close. The market is still 50-points above the 50dma following its 160-point, nearly straight-up bounce off the October lows.  This is the eighth-week the market’s been above the 50dma and is the longest stretch since we did nine-weeks back in January and February.  No matter what side of the bear/bull debate we fall on, it is perfectly reasonable to expect the market to retest support at the 50dma in coming weeks.  Sometimes that involves a pullback, other times it simply means pausing so moving average can catch up.

MARKET SENTIMENT
The last few weeks have been worry-free once our politicians quit their bickering and raised the debt ceiling, removing the risk of a catastrophic default.  Since then it’s been clear sailing with the tail winds of Yellen’s confirmation hearing and stronger than expected October employment numbers.  But the thing is the market is a worrier by nature and it cannot go long before fear over some impending disaster creeps in.  Today’s weakness is largely attributed to a bad day on the German markets and increasing concern over Taper in our part of the world.

Markets often move in waves as the pendulum of sentiment swings between fear and greed.  It’s been a good run and we should expect a move the other direction at some point.  But when the fear creeps in, embrace it, don’t be afraid of it.  Nervous sellers dumping shares at a steep discounts is the way confident traders make money.  Their fear is our profit.

TRADING OPPORTUNITIES
Expected Outcome:
Anyone holding out for higher prices in the near-term needs to see the market reclaim 1,800.  This proves dip-buyers are alive and well.  Without that, we could see the market slip back to the mid 1,700s as value oriented buyers wait patiently for more attractive prices.

Earlier this year the traditional “sell in May” was a bad idea, as was the conventional wisdom  that September and October are horrible months to own stocks.  Now we have many of those same people pointing out how strong December traditionally is.  2013 hasn’t payed much attention to conventional wisdom, so I wouldn’t count on the Santa Clause Rally either.

Alternate Outcome:
Reclaiming 1,800 and setting new highs this week shows this rally isn’t ready to take a break and wants to keep going.  While we can debate the sustainability of such a move, only price pays and we cannot argue with a rallying market.

Trading Plan:
Traders need to quickly decide on what timeframe they are using.  Longer-term investors will sit through any near-term weakness and use these opportunities to buy more of their favorite stocks.  Shorter-term investors should lock in recent profits and look to buy back in at lower levels.  The most aggressive can short the market with a stop above 1,800.  If we reclaim and hold 1,800 we need to reevaluate expectations of near-term weakness.

MSFT daily at end of day

INDIVIDUAL STOCKS
TSLA blew up in shorts faces as a German regulatory agency deemed the car safe following recent reports of battery fires. That sent the stock up $20.  But is this a fundamental catalyst that will get the momentum bandwagon going again?  That is harder to say.  I have my doubts, but if the stock reclaims the 50dma, then let the party continue.  If it hits its head on this level, we likely still have more selling in front of us.  No matter how safe the car is, the public if fascinated by this story and expect any future car fires to be front page news.  This is no different from the TM gas pedal incidents or Gulf Coast shark bite scares.  The more rare the event, the bigger the news it is, especially when someone catches video of it on their smart phone.

AAPL is off to the races again as the iPhone and iPad are flying off the shelves this holiday season.  While that was expected, more surprising is the PBS News Hour reported that MSFT‘s Surface was the best-selling tablet at Best Buy over the weekend.  While this was aided by aggressive pricing, buyers might actually be looking for more utility out of their tablets than Angry Birds and Candy Crush.  I believe the future lies in full featured tablets and MSFT/INTC are the only ones providing these capabilities.  While many accuse MSFT/INTC of falling behind the times, I actually think they are ahead of the pack on this one.

Plan your trade; Trade your plan