Monthly Archives: December 2013

Waiting for the bounce

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:10 EDT

MARKET BEHAVIOR
Stocks slipped under 1,800 in midday trade as dip buyers were unwilling to defend that support level.

MARKET SENTIMENT
Stocks go up and stocks go down.  We had a strong, 150-point rebound from the October lows and no matter what side of the fence we fall on,we shouldn’t be surprised by occasional selling along the way.  The bigger question is if this is just another routine, buyable dip, or the start of a stumble into year-end.

To bounce we need dip buyers.  These are either bargain hunters who find deals too good to resist, or regretful traders who missed the prior run and jump at the chance to get in at earlier levels.  Since we are only one percent from all-time highs, we can pretty much eliminate bargain hunters as a source of support.  These buyers wait for better discounts and will holdout until at least the 50dma before finding prices too attractive to resist.

Without bargain hunters, that leaves us dependent on chasers to continue pushing us higher, the proverbial next greater fool.  While these people are always out there, we want to know how much money they have left to throw at this market.  Given the strong move since the start of the year, we can assume many of the chasers prepared to buy this market have already bought.  While there are mountains of money stashed in savings accounts and bonds, that represents a multi-year story as it flows back into the market and has a limited impact on day-to-day trading.

TRADING OPPORTUNITIES
Expected Outcome:
With everyone justifying why we should own stocks at these levels tells us these people are already fully invested.  With fewer skeptics to convert into buyers, that makes it more likely the market will struggle to continue making strong gains.  Prices move when people change their minds and trade that new outlook.  Since many are now comfortable owning this market, that means we might be running out of new buyers.

Alternate Outcome:
Rallies go far further and longer than anyone expects.  There’s been a loud chorus calling for a pullback since March, yet here we stand 300-points higher.  There is no reason this remarkable rally needs to stall out here and we could easily surge another 50 or 75-points into year-end and the buying frenzy continues.

Trading Plan:
With limited upside and material risk underneath, the risk/reward favors locking in profits and resisting the urge to buy the dip, at least for a little bit.  The most aggressive can short this violation of support with a stop above it.

Plan your trade; trade your plan

Testing support at 1800

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

MARKET BEHAVIOR
Stocks dipped for a second day, but managed to hang on to 1800.  This level was resistance in early November and is now providing support here.

MARKET SENTIMENT
Much of the recent chatter and articles revolve around defending why we are not in a bubble, or talking about the Santa Claus Rally.  While there is cynicism around the edges, far more people are making excuses to hold than claiming this is a golden shorting opportunity.   That is a remarkable shift from a few months ago when the consensus was calling for a pullback.

Sir John Templeton famously said  “Bull-markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.”  We are clearly past pessimism and skepticism, the only question is if this is optimism or euphoria.  This morning the Stocktwits’ SPY sentiment gage was well over 70% bullish, far and away the highest reading of the year.  While not a scientific sample and valid way to extrapolate broad market sentiment, it does give us insight into which side is confidently bragging about their positions.  As the saying goes, hubris precedes the fall.

While sentiment measures make poor timing signals because we never know how far is too far, they do give us a good sense of which direction the market is poised to move.  Since there are few worries holding this market back, it is hard to imagine a single piece of good news that will launch us higher.  On the other hand, one piece of bad news could easily send us into a tailspin.

TRADING OPPORTUNITIES
Expected Outcome:
While a trend is more likely to continue than reverse, we also need to account for the risk/reward for each trade.  While the market could easily continue inching higher, the potential for a big move is to the downside.  While it rarely makes sense to take big risks for small returns, buying calls is one way to squeeze every last drop out of this up-move while also managing downside risk.

Alternate Outcome:
The problem with sentiment is we never know how far is too far until after the fact.  This market could continue grinding higher through next year as the wider population embraces stocks for the first time in five years.  While this outcome relies heavily on the next greater fool theory, it does happen and we need to watch for it.

Trading Plan:
1800 is the line in the sand.  If dip buyers fail to defend this level, it signals further downside.  The 50dma is back at 1750 and retesting this level is not unreasonable and actually constructive for continuing this rally into next year.  If the market holds 1800, expect a slow grind higher for the rest of the month.

AAPL daily at end of day

INDIVIDUAL STOCKS
AAPL stock had a strong Thanksgiving week as it rallied in anticipation of a good holiday shopping season. It made new high ground today, but stumbled and finished weak along with the broad market.  If we experience further weakness in the indexes, expect AAPL to give up most of these recent gains.  There is no reason for a bull to chase the stock up here and we will have the opportunity to get in closer to the 50dma.

TSLA is trading sideways in the $120s.  It failed to put in a V-bottom and is instead consolidating.  Chances are we have not seen the real capitulation selling yet.  A dip back under $100 would go a long way to stamping out the previously unbridled enthusiasms for this small car company with a huge market cap.  At this point it is hands off and is more gambling than investing.  It could continue sliding to $100 or rally $40.  It is just a coin-flip.  Anyone tempted to buy this dip should continue waiting and let the stock prove itself first.  Better to be a little late than a lot early.

Plan your trade; trade your plan