Five in a Row

By Jani Ziedins | End of Day Analysis

Dec 05
S&P500 daily at end of day

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

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

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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.