All Posts by Jani Ziedins

PM: More left in the tank?

By Jani Ziedins | End of Day Analysis

PM Update

Stocks continue finding support, suggesting further upside.  AAPL still cannot get out of its own way and high-flyers keep flying higher.

MARKET BEHAVIOR

Stocks closed above 1550 for the 4th consecutive day and are building support for a potential continuation.  Volume was extremely light for the third-day as few are looking to buy, but even fewer are trying to sell.

MARKET SENTIMENT

Tops from unsustainable levels rollover fairly quickly.  The surge of buying pushes the price beyond what is reasonable and as soon as the euphoric demand exhausts itself, the market quickly reverses.  Present strength and support suggests there is upside left in this move.  If buying really was exhausting itself, we could not continue holding these levels.

This is a departure from what I’ve been talking about the last few days.  While the analysis showing this market is getting close to a top is still valid, recent price actions shows it is premature.  Market go further and longer than anyone expects and that seems to be the case here.  Picking tops is tricky business and there is no reliable way to do it.    The only thing we are left to decide is if we want to sell into strength on the way up, or wait for weakness and get out on the way down.   My style is selling early, but that is personal preference and everyone needs to figure out what works best for their personality and trading style.

TRADING OPPORTUNITIES

Expected Outcome:
We have to decide how much profit we need to be successful traders.  The market rose 3.3% the last two-weeks.  100% leverage doubles that return to 6.6%.  No one is going to get rich off of 6%, but what if we set a goal of capturing gains like this several times a year?    Nab a high-probability trade every other month and that adds up to a 47% ROI.  Do it once a month and it compounds to 115%!

Many traders have a hard time selling into strength because they can’t let go of missed profits when they cash-in too early.  What if waiting for those extra profits is what is holding them back?   Many would scoff at trading 3% swings in the indexes, but there is real money to be made in it.  We all have to ask ourselves why we are doing this.  Is it so we can brag to our neighbor that we bought AAPL or PCLN before they did?  Or are we in this to make money?  If the goal is making money, I’ll take boring 3% moves in the index all day long.

It is likely this market will continue higher.  We traded above 1550 for the fourth day and if it was going to breakdown it would have happened already.  If we hold 1550 again tomorrow, it is buyable for another dozen ponts higher.  If we break under 1550, that is likely the end of this rally; markets can only bounce so many times and this one is nearing its quota.

Locking-in profits here is preferable, but if a person must trade, buy support and sell a breakdown.  Keep any upside gains on a short leash, especially if the breakout is sharp and on high volume.

Alternate Outcome:
This could be the half-way point in a six-month monster rally.  There is no real reason for this market to breakdown other than running out of buyers, but the stock market rally and bond slide could keep pushing new money into stocks as the herd chases performance.  I am cautious at these levels because it seems like fear of a pullback is diminishing, but I will continue looking for signals that this move still has legs.

INDIVIDUAL STOCKS

AAPL gave up a strong rebound to finish flat.  The stock rallied to $435, but hit its head sold off into the close.  What else is there to say but great company, lousy stock.  The inability to mount a meaningful rebound show the high probability trade remains lower.

AMZN, LNKD, and NFLX all added to their ridiculously obscene valuation.  The market often humiliates those that spend too much time thinking about what it should do and not enough trying to understand what it does.  There are very legitimate reasons why AMZN, LNKD, and NFLX continue higher while AAPL continues lower.  Understand what moves markets and the mystery vanishes.

Stay safe

AM: Buy, sell, or hold

By Jani Ziedins | Intraday Analysis

AM Update

Markets finding support, but are we close to the top?

MARKET BEHAVIOR

Stocks continue finding support around 1550.  We dipped modestly but bounced above break-even by late morning.

MARKET SENTIMENT

Retail sales came in higher than expected, showing the payroll tax and gas prices are not taking too much of a bite out of the economy, but the market responded with a yawn. That means either it was already priced in, there are few people left to buy the news, or the market simply doesn’t care about fundamentals right now.  Lets look at how these various explanations affect where we are headed.

Given the market’s recent rise, it isn’t surprising a fair amount of good news is already priced in.  The long rally also has a calming effect on the traders, helping them forget about their worries.  If traders feel pretty good about the state of the world, they are likely fully invested.  But if most are fully invested, who is left to buy good news?

Everything I see says this rally is running out of gas, but that doesn’t mean this is the top.  Momentum can easily carry us higher.  In addition, tops are often volatile and indecisive as buy-the-dip traders fight it out with top-pickers.  This back-and-forth can chew up a traders in no time if they react to each dip and bounce.

1565 is clearly in the market’s sights and it is a coin flip if we get there.  Buying after such a strong run is clearly late in the game and doesn’t provide a favorable risk/reward.  Shorting here is also a bit premature because the up-trend is still intact and it would be nothing more than a gambler’s game of picking-a-top.  While that can be fun, it usually isn’t profitable.  All of us are in this because we love the challenge of the markets, but we often forget we don’t always need to have a trade on.  In fact forcing a less than ideal trade is how smart investors often give up most of their hard-earned profit.

TRADING OPPORTUNITIES

Expected Outcome:
The market is entering an indecisive and volatile period as it bases and gets ready for its next move.  Markets often top fairly quickly, so holding 1550 for another day bodes well for the continuation.  Failing to close above 1550 on Thursday shows demand is struggling to keep up and the market will likely encounter a bout of selling.

The market could easily go either way, so it is hard to justify a trade here.  Wait for it to show its hand and then grab on.

Alternate Outcome:
These signs of topping can also count as resting.  We’ve come a long way and it makes sense for the market to slow down.  Sideways is often a way the market catches its breath before continuing higher.  But for the market to continue higher, it would be helpful to see more traders calling the top and following that talk up with selling and shorting the market. Seeing it hold up in the face of that wave of cynicism demonstrates it still has room to go.

The biggest challenge with subjective sentiment analysis is the risk of confirmation bias that skews a trader’s view of what ‘everyone’ is thinking.  As this market rallied, I kept hearing bears say how bullish everyone was.  But the interesting thing is I heard more bears talk about bullishness than I heard firsthand from bulls.  Obviously these bears had a preconceived bias and they sought out data that supported their existing views.  This is not all that different from buying a Honda and suddenly it seems like everyone is driving a Honda.  The number of Hondas didn’t change, just that you now notice them.  Bears focus on bullish opinions and bulls on bearish ones.  The hard part is seeing what is really there, not just what we want to see.

INDIVIDUAL STOCKS

The chop in AAPL continues.  Up one day, down the next.  The stock is mostly holding between $425 and $435 with occasional excursions a few dollars above or below.  Look for a breakout either way to have some legs because this is becoming a closely followed range.  A break above will trigger a wave of buying and a dip below will setoff selling.

The sideways trade shows the stock is not over-sold and primed for a sharp bounce, so anyone trading that thesis needs to reevaluate.  Chances are the breakout/breakdown will be short-lived and anyone trading that move should take profits early.

NFLX is launching off of support and putting the hurt on bears again.  Stocks that are too-high most often continue higher.  Trade the momentum, don’t fight it.  Arguing with the market is one of the surest ways to give money away.

Stay safe

PM: The streak ends

By Jani Ziedins | End of Day Analysis

PM Update

The streak ends, but it is too early to proclaim the rally is dead.  Another AAPL rumor comes and goes.

MARKET BEHAVIOR

Stocks made new highs in early trade, but couldn’t hold those gains and fell into the red by mid-morning.  From there the market chopped around, finishing near the midpoint between the daily high and low.  Volume was lower than average, but higher than Monday’s extremely light levels.

MARKET SENTIMENT

It was only time before the market ended its winning streak and we cannot read too much into today’s quarter percent decline.  The more interesting insight will come as the market responds to this selloff.  Was this just a pause on the way higher or the start of something more?  There are many signs the market is running out of buyers, most notably the lack of short-squeezes on strong employment or new highs yesterday and today.  Bears and cynics were a big part of the rally and it is a major shift in sentiment if they gave up fighting the rally.

 

TRADING OPPORTUNITIES

Expected Outcome:
There is not much to do here except wait for the market to reveal its intentions.  Spending a couple more days between 1550 and 1555 will demonstrate constructive support and lack of meaningful selling.  At that point we can grab on for a ride up to 1565 and 1575.  But if the market fails to hold 1550, a larger pullback is in store.  The first level of defense is 1530, then 1525, 1515, and finally 1500.

The easiest trade here is locking in profits and letting the market tell us what it wants to do next.  We are fairly deep into this rally and these things have to end at some point.  Pushing our luck for another few points of upside is getting greedy.

Alternate Outcome:
Markets often go further and longer than anyone expects.  Clearly this market did that since the chorus started calling for a pullback two-and-a-half month ago.  I am probably early in taking profits too, but I always prefer taking profits early because it is a lot easier to identify the next trade when holding cash.  This is a personal preference and everyone needs to find what works best for them.  Trailing stops also work well for people who are reluctant to sell on the way up.

If we are only half-way through this rally, there will be plenty of time to get back in.  Holding 1550 shows the market is ready to continue higher.  If the market is finally running out of buyers, it will fall apart fairly quickly.  If the market holds these levels, we can always buy back in.

INDIVIDUAL STOCKS

AAPL continues jerking traders around.  This was the second time in two-weeks the stock surged on rumors only to give back all those gains the next day.  Holders are so desperate for a catalyst they embrace any rumor that comes along.  This is not constructive behavior found in stock that is ready to bottom.  Until the it breaks the cycle of lower-lows and lower-highs, the down-trend remains intact.  Broad market weakness will likely put even more pressure on AAPL, pushing it under $400.  These things go further and longer than anyone expects and I don’t see sings AAPL’s selloff is coming to an end.

Stay safe

AM: A rest day

By Jani Ziedins | Intraday Analysis

AM Update

Early weakness threatens the seven-day winning streak.  AAPL struggles to add to yesterday’s gains.

MARKET BEHAVIOR

Stocks are modestly in the red this morning, but a down-day shouldn’t surprise anyone given the streak of seven-consecutive up-days.

MARKET SENTIMENT

Is this weakness another buy-the-dip opportunity or the start of something bigger?  Dips are buyable until they aren’t.  Every diversified portfolio is showing profits as the market keeps notching 5-year highs, but we all know this cannot last forever.  Weakness here is a no-brainer after running 70-points, but do we buy, hold, sell, or short this dip?

The most conservative option is to sit this one out.  Tops are often volatile and flush out the uncommitted at the exact wrong moment.  Changes in trend are one of the hardest times to trade because of the whipsaws and head-fakes.  The easy trade is cashing in profits and waiting for the next high-probability opportunity.

1565 is a very seductive level and traders are fixated on all-time highs, but that could cause the market come up short.  To figure out where the market is headed, we first need to understand what everyone is thinking and how they are positioned.  If everyone expects us to reach theses all-time highs, they are still holding on.  If bears also expect this, they will resist shorting.  But if everyone is holding and no one is buying, the market will stall and gravity will take over.

While earlier pullbacks bounced, selling was fueled by nervous holders and aggressive shorts. Markets quickly reversed because both of these groups lack the firepower to sustain a move.  But if the market starts selling-off here, it isn’t driven by either of these groups that are waiting for all-time highs.  Instead, this could be the start of real and sustainable selling.

TRADING OPPORTUNITIES

Expected Outcome:
The rally trade is getting a bit obvious and we should expect a pullback to at least 1550.  How the market responds to this level will give us more information about where it is headed.  Support at 1550 is constructive for a near-term continuation through all-time highs.  Failing support at 1550 would form the right-half of the head in a bearish head-and-shoulder pattern.

Either way traders with profits should consider locking them in.  We are in this to make money and the only way to do that is by selling winners.  Obviously the market will continue higher once we sell, but the goal isn’t to make all the money, just the easy stuff.

Alternate Outcome:
The market is on hot streak and there is no reason it has to end at seven-days.  We could easily see nine, ten, even twelve days in a row, especially when everyone is fixated on new all-time highs.  The race is between drying up demand and scarce supply.  Will confident and ambitious holders pull in supply faster than we use up available buyers?  Or will buying dry up and be unable to swallow the normal supply that hits the market every day?  I wish I had an answer for everyone, but this is the market and we have to make educated guesses.  At this point a couple of rest days seem more likely than extending the streak.

INDIVIDUAL STOCKS

AAPL gave back most of yesterday’s surge and is holding just above $430.  The key level remains $455 and buying before then is trying to catch a falling knife.  In every instance until now these strong surges were selling opportunities.  This stock is full of hopeful holders that are excited by every rumor that makes the rounds.  This shows way too much bullish and optimistic sentiment remains in the stock to sustain a meaningful rebound.  AAPL topped as the most loved stock in the market and it will likely bottom after it becomes the most hated stock and people are ashamed to admit they own it.  We are clearly not there yet.

Stay safe

 

PM: Good times keep rolling

By Jani Ziedins | End of Day Analysis

PM Update

Stocks set a new high yet again, and AAPL had an interesting day.

MARKET BEHAVIOR

Markets rose for the seventh-consecutive day on the lightest volume in a month.

MARKET SENTIMENT

Sometimes low-volume is bullish and others it’s bearish.  Like everything in the market, there are two equally valid and opposite explanations for every observance.  Early in the rally low-volume signaled reluctance and cynicism and  these holdouts provided the fuel to push the market higher.  But now that we’ve risen this far, low-volume signals the market is struggling to find new buyers and we are approaching exhaustion.

Of course this is like reading tea-leaves and if the answer was obvious everyone would know what to do.  The best we can do is use clues to identify the high-probability trade.  We’ve risen seven-consecutive days and nine of the last ten as the market  surged 70-points in two-weeks.  The market made new highs on declining volume.  We had the perfect setup for a short-squeeze between Friday’s employment surprise and today’s new highs, yet few shorts ran for cover, showing shorts are finally shying away from this market.  And lastly we are in the final weeks of a very bullish quarter.  It seem the only thing keeping this rally going is reluctance of holders to sell (greed) and that can only carry us so far.

TRADING OPPORTUNITIES

Expected Outcome:
While momentum is clearly higher, the rally is on thin ice.  At the very least it needs to consolidate recent gains near 1550 before making a sustainable assault higher.  If the market keeps reaching for all-time highs over the next couple days, look for an imminent pullback due to exhaustion.

This is a good time to take profits and reevaluate.  Even long-term investors should consider locking in a portion of their gains and wait to buy those stocks back cheaper in a month or two.  The market ran 210-points since the November lows and it is extremely optimistic to expect the rate of gains to continue indefinitely into the future.

Selling winners into strength is one of the hardest things to do, but it is what separates the successful from the wannabes.  If the average retail investor waits to sell pullbacks and successful investors claim the secret to their success is selling early, you have to decide who you want to model your trading style after.

Alternate Outcome:
Individual markets are entirely unique and one similar example would implode here while another rallies 50-points.  No one knows what will happen and the best we can do is trade probabilities.  If the high-probability trade is a near-term top, then the alternate outcome is a continuation.

The market is clearly drawn to 1565 and we could easily hit that on Tuesday.  The all-time high is just a few ponts beyond that and wouldn’t be a stretch to get there. Hitting these major milestones could trigger a new short-squeeze, propelling the market even higher.  From there it could consolidate those gains before continuing even higher.  There are plenty of examples in the last 100-years where the market strung together six-month rallies and there is nothing to say it cannot happen here.

But the best trade is sticking with probabilities and locking in profits.  No doubt the market’s momentum will carry it higher, but it is impossible to pick a top, so we shouldn’t try.  If the market exhibits sustainable strength over the next week (consolidation), we get back in.  Until then, lets catch our breath and look for the next high-probability trade.

INDIVIDUAL STOCKS

AAPL had an interesting day.  The stock popped $10 intraday over just a couple of minutes on no news.  The rumor is some major player took a huge stake and that got everyone excited.  If it really was a major money manager, they should fire their broker for negligently running the stock up like this.  Most pros ease into their positions so they don’t bid against themselves like this and is why I doubt the validity of the rumor.  And even if a major investor plowed a ton of money into the stock, that doesn’t mean he/she has any better idea of where the stock is going than we do.  (assuming this is not illegal insider trading)

The bigger question is if this pop signals the bottom is finally in.  I’ve been fairly critical of AAPL since it collapsed after earnings.  Over the last month-and-a-half any strength has been a selling opportunity.  Has the stock finally run off all the bulls and reached a capitulation point?  I still say no.  Don’t get me wrong, I’m not an AAPL hater and they make fantastic products.  I’m even rooting for the stock because it is such an important part of investor confidence and a major component of the indexes.  But at the same time I have to be a realist.  To break the down-trend the stock needs to make a higher-high.  There is a minor high at $455 and a major high at $485.  Closing at $437 does nothing to break the trend lower and buying this bounce is simply bottom-fishing.

Going forward it seems likely the stock will trade $400 before $485, especially if we see broad market weakness  in the near-term.

Stay safe

AM: Is the market safe?

By Jani Ziedins | Intraday Analysis

AM Update

Markets are aiming for another up-day and AAPL continues lagging.

MARKET BEHAVIOR

Stocks opened modestly weaker, but slowly clawed their way back to break-even and beyond by mid morning.  What is more important than gain or loss is trading tight and supportive of last week’s breakout to 1550.  This shows holders continue holding and are not locking-in profits.

MARKET SENTIMENT

Is this market safe or dangerous?  The sustained rally over the last several months has been a great time to own stocks and an easy ride for most of the way.  But easy is a relative term that only works in hindsight.  Buying the market January 3rd after a two-day, 60-point move was anything but easy, yet here we are up another 90-points.  Conventional tools of fundamental and technical analysis kept many traders on the sidelines, but a speculator that understands market sentiment and contrarian investing was able to harvest some nice gains.

Bears and pessimists have called for a pullback the last few months and while they were slaughtered in this straight up market, eventually they will be right.  Every rally ends and this one will be no different, the only challenge is knowing when to hold ’em and when to fold ’em.  Obviously every new day brings us one day closer to the end and just when we feel most comfortable is when we are at the greatest risk.

Failing to set off short-squeezes is a great sign sentiment is shifting.  This market has largely rallied on the backs of cynics and shorts.  Breakouts were decisive as shorts scrambled over each other to get out.  We’ve seen less of that recently, meaning shorts are starting to give up.  This is HUGE.  It shows doubt is giving way to acceptance.  Traders that were fighting this market are giving up and joining the bandwagon and this means the pool of available buyers is dwindling.

TRADING OPPORTUNITIES

Expected Outcome:
The market will likely coast a bit higher.  All-time highs at 1565 and 1576 are attractive targets and the market will likely be drawn to these levels.  The question is how do we get there.  Will it be a straight run, or turbulent volatility?  Typically we see choppiness at transition points and the shift from rally to pullback is rarely clean.    This is where many traders end up loosing  all the gains they made in the rally.  This is a difficult place to make money and often the most conservative trade is moving to cash and waiting for the next high-probability opportunity.  If someone is reluctant to sell, at least use a trailing-stop to lock in gains.

Alternate Outcome:
The market doesn’t have to do anything and even if its gone too-far, too-fast it can keep going.  If this were easy everyone would be rich.  While the market could continue rallying here, a rally that lasts several more months would need to be at a moderate and sustainable pace.  If a trader gets off too early, there is still time to recognize the mistake and jump back on.  We can only win this game if we sell our winners and most of the time that means selling too early.

INDIVIDUAL STOCKS

What is there to say about AAPL?  It is down when the market is up.  The dip-buying from last week is evaporating and no meaningful follow-on buying is propping-up the recent bounce.  What cannot go any lower is acting like it wants to go lower.  A short trade with a stop above $435 and taking profits around $400 looks like an attractive trade.  Given the explosive nature of this stock, using options would help define risk in the case of bullish news.  The Mar28 $420/$400 put-spread I mentioned last week still looks attractive.

Stay safe

LA: Getting close

By Jani Ziedins | Weekly Analysis

Look Ahead

MARKET SENTIMENT

It finally happened, the market had the biggest up-week since the start of the year.  Volume was off a tad, meaning the gains were due to lack of selling, not enthusiastic buying.  In fact, Friday’s lack of a short-squeeze on better than expected employment shows we are running low on buyers.  Markets move exclusively on supply and demand, and if demand is drying up, lack of supply is the only thing keeping this rally going.  Holders suffered regret every time they sold and were rewarded every time they sat through a dip.  This has been going on long enough that most owners are now content riding the market higher and ignore any intermediate volatility.  At this late stage in the rally, that is more indicative of greed and complacency than courage and conviction.

The other big catalyst is the end of the first quarter in a few weeks.  It is common for individual quarters to exhibit unique personalities because market participants tend to view the world through the same lens.  Last quarter markets were embroiled with fear over another four-years with a Democrat in the White House and the impending Fiscal Cliff.  Hindsight being 20/20, obviously that selling was overdone and the market rallied strongly as doom-and-gloom was grossly exaggerated.  This quarter has been nearly straight-up as the underinvested were forced to chase at ever-increasing valuations or risk being left behind.  Once the quarter ends, the slate is wiped clean and institutional investors have more freedom and flexibility to make their next move.  If they spent all Q1 chasing, the are likely already fully invested and without new buying, the market will fall under its own weight.

While nothing can tell us exactly when a market will top, these clues indicate we are getting close.  The S&P500 is a dozen points from an all-time closing high and couple-dozen from the intra-day high.  We are so close to these widely followed levels that we will likely be drawn to them.  What happens after that is the million dollar question.  Many contrarians and seasoned  traders will use the all-time high hype to unload stock on to the euphoric masses.  The climax of chasing and wave of profit-taking could be what finally does to this market what no bearish headline could.

TRADING OPPORTUNITIES

Expected Outcome:
Now is the time to be locking in profits, not initiating new positions.  It is likely the market will coast higher over the next couple weeks, but every day brings us closer to the pullback.  We could see the market continue higher early in the week and takeout those all-time highs.  Stretching a six-day winning streak to eight or nine is obviously a dangerous place to buy and any holders should consider selling into the strength.  A modest dip early in the week that finds support above 1530 means we are taking our time in reaching 1575, but those highs are still on the menu.  Failing support at 1530 shows we finally ran out of buyers and the uptrend is broken.  Depending on the circumstances, this violation could finally be the right time to short the market.

Alternate Outcome:
The market doesn’t need to top here and we could only be halfway through this rally.  The volatile pullback to the 50dma refreshed the market by shaking out many weak holders.  Volume has been restrained through the entire rally and doesn’t reek of unsustainable chasing.  Obviously the sign this market is not ready to selloff will be the lack of a selloff.  Trailing stops keeps a trader from selling too early and 1530 is a decent place leave a stop.

INDIVIDUAL STOCKS

In spite of how encouraging support at $420 on the daily chart feels, a look at a weekly chart shows no meaningful support yet.  There is a lot of confusing and misleading noise in daily charts and to really understand what a stock is doing, take a step back and look at the weekly.  The AAPL could be forming a double bottom between $432 and the recent low at $419, but bottoms typically happen on a material change in sentiment, something that still seems absent.  Markets often trade in such a way that hurts the largest number of traders.  It really seems further weakness would hurt a larger number of hopeful holders than a rally would hurt shorts.  At these valuations, more people are interested in buying than shorting and that has been the problem all along.  If everyone believes in the stock and already owns it, who is left to buy?  Look for institutional money managers to continue unwinding their overweight positions into quarter’s end.  Q2 could being new lift back into to the stock, but weakness in the broad market will be a serious hurdle to overcome.

Stay safe

WR: Big weekly gain

By Jani Ziedins | Weekly Analysis

Weekly Review

Strongest weekly gains in two-months as holders refuse to sell and keep supply scarce.

MARKET BEHAVIOR

Stocks had their best weekly gains since the start of the year, setting multiple-new highs along the way.  Weekly volume was unremarkable on this 2% up-week.  The market is 45-points above the 10wma and 124-points above the 40wma, both fairly reasonable levels for a bull market.

We are 14-points shy of the all-time closing high and 24-points from the intra-day high.  This rally set numerous records already, is all-time S&P500 highs next on the todo list?

MARKET SENTIMENT

Markets moved past recent volatility and rallied six-days in a row, gaining 50-points in just over a week.  This finally produced the large weekly gains we have looked for as a potential signal of impending exhaustion, although volume was modest and shows chasing has not hit a fever pitch yet.

We are within arm’s reach of all-time highs.  Can the market really come this far and not take them out?  Everyone is watching these levels and recent strength is emboldening holders.  They are less likely to sell when all they can think about is how smart they are and much money they are making.   Expect their confidence and greed to keep supply tight.

Losing shorts last week is a major development since they have been instrumental in powering the market higher with their short-covering.  The lack of pop on Friday shows their numbers are dwindling because the gap-up on strong employment was the perfect setup for another powerful short-squeeze.  The reason it didn’t happen is because bears are finally growing wary of shorting this market and were sitting this one out.

TRADING OPPORTUNITIES

Expected Outcome:
The market is drawn magnetically to record highs and no doubt all-time highs are on the todo list.  There are three-weeks left in this quarter and the market has a little more upside left in it.  Strength early in the week, pushing us to 1565 and beyond should be sold.  We’ve come a long way and the market needs to rest, even if it is just a few days.  If the market dips early in the week, finding support above 1530 signals a continuation and record highs before the end of the quarter.  Violating 1530 likely means we ran out of buyers and the pullback is happening.

There is no good reason to hang on much longer in this market.  We have 20-points of upside and 100-points of downside.  That doesn’t create a favorable risk/reward.  Once we are in cash, that frees us to look for the next trade.  Maybe that is shorting the correction, or maybe buying the continuation.  Either way the clear head from being in cash is what let us see the next profit opportunity.

Alternate Outcome:
Six-consecutive up-days isn’t even close to the record and we could string together another six.  But just because it is possible doesn’t mean it is likely.  We are here to make the high-probability trade and that often means getting out early.  Maybe we proactively sell into strength or alternately use a trailing-stop , but at some point we have to say good enough.  If this market has a lot more upside in it, it will slow down and rally at a sustainable pace, meaning it will be easy enough for us to recognize and correction our mistake of selling too soon.

Stay safe

PM: What just happened?

By Jani Ziedins | End of Day Analysis

PM Update

An interesting day in the market that gives us more questions than answers.  AAPL’s underperformance continues and AMZN defies logic and reason.

MARKET BEHAVIOR

Stocks set new highs and closed above 1550 for the first time since 2007.  Today was the sixth consecutive up-day and eighth out of nine, covering over 65-points in two-weeks.  Volume was modestly higher on a day when the employment report came in far above expectations.

MARKET SENTIMENT

It was a fascinating day and leaves us a complicated sentiment puzzle to figure out.   Stocks gaped up at the open on strong employment numbers, but it failed to trigger a short-squeeze or follow-on buying and stocks slid into the red by mid-morning.  After just a few minutes under Thursday’s close, the market found a bottom and ground higher through the day.  Volume was surprisingly average given the level of disagreement between optimists and pessimists.  We had a compelling new data point, but it failed to change many people’s mind and cause them to change their positions.

Lets breakdown what happened intraday to see if it gives us any insights into what people are thinking and how they are positioned.  The open gapped higher as a wave of buy-orders flooded the market in anticipation of a blowout day on the strong employment report.  Some was short-covering, others were headline traders, but within minutes this buying climaxed and the market reversed sharply, giving up 10-points in less than an hour.  This weakness on the heels of unexpectedly good news certainty left people scratching their head, but not long after the market found a bottom and chewed its way higher, finishing near the day’s high.

What happened here?  Obviously new buyers failed to show up after the gap higher.  The short-squeeze never materialized because shorts are afraid of this market after last week’s volatility tore them to shreds.  We might have even seen a bit of selling strength as the market finally broke 1550 and many traders felt six-days in a row was unsustainable.  This early weakness chased out the premature buyers and left others wondering if the market finally ran out of steam.  And to be honest, the market did run out of buyers.  It wasn’t dip buyers that saved the market today, but running out of sellers.  This entire rally is built on a foundation of unflappable holders and story added another chapter today.

The dip on great employment numbers, low-volume, and the slow grind higher kept bear hopes alive.  Cynicism remains and today’s employment report didn’t change anyone’s mind.  Reluctance from those sitting on the outside continues fueling this rally and the trend higher remains intact.  The one noteworthy absence was shorts and going forward we might not be able to rely on their buying each time we make a new high.

TRADING OPPORTUNITIES

Expected Outcome:
It appears sentiment stayed mostly the same in spite of today’s employment gains and the close above 1550.  This means we should expect a continuation at least temporarily.  We still need to be cautious of accelerating gains on increasing volume, but a pullback to 1545 and sideways trade next week will set the stage for more upside.

I moved my trailing-stop up to 1530 and don’t expect the market to touch this level until it is forming the right side of the head in a head-and-shoulders pattern.

Alternate Outcome:
I expect modest gains before topping in a H&S pattern.  That leaves two alternate outcomes, an immediate crash and a continuation higher.  Today’s dip on good news showed buyers are a scarce and even bullish news won’t get them off the sidelines.  We need to use a trailing stop-loss to protect recent gains from a market meltdown due to a lack of buying.

A more interesting idea is we are only half-way through this bull rally.  Last week’s pullback to the 50dma flushed out weak holders, clearing the way for a larger continuation.  It is not hard to find past examples of long rallies that had a midpoint check-back to the 50dma.  At this stage I am holding and looking for an exit, but both alternative outcomes are at the front of my mind and I am searching for any clues to support either alternative.  Next week will give us more clarity and help us identify the high-probability trade.

INDIVIDUAL STOCKS

AAPL remains stuck between $420 and $435.  Oversold stocks are like a rubber bands and snap back quickly.  Trading flat for a week moves us outside the window of a quick rebound.  AAPL’s trend of underperformance continued as the stock was only up a quarter-percent as compared to the index’s nearly half-percent gain.  Anyone still holding this stock because it cannot go any lower is about to learn a lesson in market extremes.  The market is full of great stocks and there is no reason to hold on last year’s big winner hoping for a bounce when there is so much more to choose from.

NFLX continues trading above $175.  The longer we hold here, the more support the stock builds and the better chances are for a continuation.  I’d still be wary of a dip under $175 setting off a wave of stop-losses, but for the time being the stock looks good.  If someone absolutely must short this stock, only short after the stock breaks $175 and take profits at $160.

AMZN is defying skeptics, trading up to $275.  The overpriced stock that is supposed to selloff keeps holding up while everyone’s favorite stock continues breaking down.  Success in the market isn’t about investing in what should happen, but what will happen.  If too many people believe something, supply and demand will force the market to do the opposite thing.  AAPL and AMZN are perfect examples of contrarian trades.

Stay safe

AM: Indifference to better than expected employment

By Jani Ziedins | Intraday Analysis

AM Update

Stocks are modestly green on a lower unemployment rate, but is the lack of a move good or bad for the rally?

MARKET BEHAVIOR

Stocks gaped at the open on stronger than expected employment, but sold off to break-even in the first hour of trade.  After briefly dipping into the red, stocks bounced back and are stuck somewhere between the open and early lows.

MARKET SENTIMENT

It is interesting to see the market’s tepid reaction to one of the strongest jobs gains we’ve seen since the recovery began.    We need to figure out why it didn’t surge higher and what this says about where we are headed.  This was the perfect recipe for a short squeeze and momentum chasing.  What happened?

Part of it is the diminished role employment played in recent months.  A year ago the market held its breath for each employment report, but now it is just another data point. Going from losing jobs to gaining jobs was a major turning point, but going from 150k to 200k gains is less meaningful.

The more concerning explanation is if we are running out of buyers and no matter how good the news, the market is stuck without new money to keep pushing prices higher.  Are we finally out of buyers or are reluctant holdouts are just being stubbornly difficult?

TRADING OPPORTUNITIES

Expected Outcome:
I’ll be honest, I expected more out of the market this morning.  When it doesn’t behave the way I expect, it makes me nervous because it means I am missing something.  We are obviously getting close to a top, but I thought we still had a bit further to go given the persistent and widespread cynicism.  The lack of a surge today means could be closer to the top than I expected.  While we are still trading in the green and I don’t want to pull the plug prematurely, I am less confident and moved my stop up to 1530.  Holding 1540 this week is supportive of the market regardless of the headlines and reluctant money managers only have a few weeks left to buy this bull before quarter’s end.

Of course there is no reason to keep holding for the last few dollars of upside.  The market rallied nearly 50 points since breaking back above 1500 last week and taking worthwhile profits is never a bad idea.  We are in this to make money and the only way to do that is selling winners.

Alternate Outcome:
The risk of an imminent top jumped this morning when the market failed to find a large pool of buyers after a decent employment number.  If the lack of buying is because no buyers are left, we will head lower no matter how good the news.  The market is still holding gains and is not breaking down, but it is enough to make me raise my stop-loss to 1530.  A closer stop-loss increases the chances of getting shaken out in a normal market fluctuations, but until I see stronger performance out of the market, I’ll keep it on a short leash.

INDIVIDUAL STOCKS

AAPL is stuck between $420 and $435.  Bottom-pickers come in below $420, but follow-on buying fails to materialize above $435.  As tempting as it is to call a bottom, there is no material supply and demand reason or change in sentiment to justify a reversal here.  In fact this pause is encouraging the hopeful and sucking in dip-buyers, making a continued selloff even more likely.  This stock needs big money to back it up and right now institutions are selling, not buying.

Stay safe

PM: Too-far, too-fast keeps going

By Jani Ziedins | Intraday Analysis

PM Update

Markets are holding recent gains ahead of the employment report.

MARKET BEHAVIOR

Another day of tight trade supporting the breakout.  This was the third-close above 1540 and shows holders are willing to hold and buyers are willing to buy.  Volume was average and slightly lower than recent days.    A fourth close above 1540 shows sellers are absent and this market wants to continue higher.

MARKET SENTIMENT

Every time the market starts making all-time highs, the academics descend from their ivory towers and warn of irrational exuberance, impending crashes, bubbles, euphoria, and all that jazz.  But the thing to remember is these guys are historians, not traders.  They call the top, the market rallies another year, and they still proclaim to the world how right they were when the market finally corrects twelve-months from now.

We are the one putting money on the line and theory just doesn’t cut it.  Telling us that markets go down after they go up is completely and totally useless.  Tell me when they will go up and down and now we have something to act on.  Without a doubt the market will pullback 7% or more at some point this year.  How do I know that?  Because the market always does.  That’s the easy part, all the money is made in figuring out exactly when that pullback is going to happen.

While I don’t pay much attention to what these academics and historians are preaching from their soapbox, the fact that they are getting airtime is meaningful.  Journalists are not analysts,  they simply report what other people tell them.  When the market is pessimistic, they interview pessimists and report pessimistic stories.  When everyone is in a good mood, they cover positive stories and interview bulls.

When the media tells us these gains are unsustainable, I know that is what traders are telling journalists.  The financial press is a great reflection of what the market is thinking.  Without a doubt this market will top and that top is coming, I just know the market won’t top when everyone is talking about it.  Whether it takes weeks or months of new highs to wring the pessimism from the markets I don’t know, but I do know the crowd and financial press usually get it wrong.  When they talk about corrections, we bet on the continuation.  I’m not saying it is impossible for the market to correct here, but it is less likely when everyone expects it.

I also want to point out financial history is a critical tool I use when analyzing the market and I don’t mean to demean the views shared by academics,  I’m simply pointing out they typically have poor timing.  We can actually broadening that statement even further by saying most people have poor timing.  If this were easy, everyone would be rich.

TRADING OPPORTUNITIES

Expected Outcome:
Last year the market was buzzing in anticipation of each employment report as the recovery was just taking hold, but recently the market is less obsessed with it.  It might be getting to the point where modest gains are taken for granted and only a big deviation will move markets.  And to be honest it really doesn’t matter one way or the other because the market reads into these numbers what it wants to see.  We don’t trade fundamentals, we trade expectations.  If bulls want to buy, they will invent reasons to buy.  If bears want to sell they will find excuses to sell.

If we take the view that the actual number is less important than what the market wants to do, we will be fairly constructive on this market because every sign is it wants to continue higher.  If we have a disappointing number, we might dip, but expect traders to find a sliver lining in the report and buy the dip.  That is what they did with negative GDP and is what they will likely do with a disappointing employment report.

Alternate Outcome:
If the expected outcome is the employment report is not a big deal, then the alternate is the market hinges on this report.  The only time this is true is when it materially changes people’s views of the future and they adjust their portfolio to reflect this new reality.  A negative employment report will not be meaningful for pessimists because they already expect it and adjusted their portfolio ahead of time.  To crash the market, the employment report would need to convince bulls to give up and sell.  While less likely, it is still a real possibility and why we start any trade with defense first.  We always know where our stops are and when the market doesn’t act as expected, we sellout and look for the next opportunity.

Stay safe

AM: Waiting for employment

By Jani Ziedins | Intraday Analysis

AM Update

Stocks are consolidating gains ahead of Friday’s employment numbers.

MARKET BEHAVIOR

Stocks are modestly higher, but hitting their head on 1545.  After last week’s volatility, the calm trade is welcome.

MARKET SENTIMENT

Holders continue holding and cynics keep resisting.  The calm trade shows stock owners are comfortable at these levels and awaiting further gains.  This market is rising on tight supply, putting a wrench in the pull-back crowd’s plans.

This is just another example of the least expected trade being the right trade.  Between December 31st and January 2nd, the market surged 65-points in just two trading days.  To any casual observer this was too-far, too-fast and everyone waited for the inevitable pullback.  That was over two-months ago and the market is up another 80-points.  The pullback crowd is technically right because every market eventually corrects, but in trading early is the same thing as wrong.  This week we have renewed cynicism claiming the all-time highs in the Dow are unjustified and signal an imminent top.  But here we are, holding those gains.

Unsustainable gains typically reverse within a couple of days because the market runs out of buyers and without demand, prices slide.  Holding these levels for a 3rd day shows there is adequate buying to support new highs.  Every jump in price invites the paranoid to lock in profits, but this is a temporary weight on the market and after a couple of days most of the that selling is done.  The end of profit-taking further tightens supply and sets the foundation for the next move higher.

Traders are waiting for Friday’s employment report.  Bulls are expecting good things and bears are waiting for reality to kick in.  Both sides have already positioned themselves and there is little adjustment by either side today, leaving trade quiet as we wait for the next economic catalyst.

Speaking of economic catalyst, are we still under sequester?  What ever happened to that anyway?  Turns out the sequester was widely expected, priced in, and nothing but media driven hype.  If the baristas at Starbucks are talking about it, you know you can safely ignore it.  The only way to get ahead in this game is by trading things people don’t know about yet.  No matter how good or bad, if everyone is already talking about it, they already factored it into their portfolio.  News only moves markets if it makes people adjust their portfolio.  If everyone expected it, they traded ahead of time and the actual news is uneventful.

TRADING OPPORTUNITIES

Expected Outcome:
It will be interesting to see how the market responds to employment tomorrow.  It will either go up, down, or sideways.  There is an above average chance for another short-squeeze to push this market above 1550, forcing under-invested money managers to chase into quarter’s end.  A poor employment report is the only thing left in the bear bag of tricks and if it fails to deliver, look for a wave of buying to hit the market.  We could see weakness if the number is bad, but it likely won’t get carried away since we flushed out most of the weak hands in last week’s pullback to the 50dma.  This market wants to go higher and likely will simply wave away a weak employment report as another excuse the continue easy money.  The last outcome is an expected report and sideways trade.  This simply supports status quo, which is a gentile climb higher.

This market is getting closer to the top with each passing day and new high.  We are not there yet, but we should be more focused on taking profits than putting on new positions.  If someone is not already in the market, don’t chase and wait for the next trade.

Alternate Outcome:
This market is ignoring a lot of negative headlines, but sometimes reality catches up at the most inopportune times.  While holders are confident and keeping supply tight, there is nothing that shakes confidence like falling prices.  Even the most resolute bull will quickly fill with doubt when the market is plunging.  The market should find support around 1525 in the event of near-term weakness, if it doesn’t t we need to prepare for lower prices.  A dip under 1500 means the pullback is underway, but we will likely see a bounce, forming the right shoulder of a head-and-shoulder.  Use that bounce to put on a short.

INDIVIDUAL STOCKS

AAPL traded lower before jumping above break-even midmorning.  Volatility remains high as bulls and bears are fighting it out over where the stock will go next.  Bottom-pickers were excited about Tuesday’s powerful rally, but so far it hasn’t triggered much follow-on buying from a larger pool of investors.

NFLX is challenging support at $175 and a dip under this key support level will trigger a wave of stop-loss and bear shorting that pushes it back to $160.  But this is just a step back in the climb higher.

Stay safe

PM: What will kill this rally

By Jani Ziedins | End of Day Analysis

PM Update

The market is consolidating gains ahead of employment, AAPL is still struggling for direction, and NFLX is building a base.

MARKET BEHAVIOR

Stocks traded flat on average volume, a nice support day for recent gains.

MARKET SENTIMENT

Neither buyers nor sellers were out in force.  Holders prefer holding for further gains and are not cashing in recent profits.  The under-invested are still sitting on their hands, hoping more than ever the expected pullback is just around the corner.

The Dow made new highs and many headlines doubt the sustainability of these gains, but so far there hasn’t been anything unsustainable about this rally.  Volume has been restrained and we checked back to the 50dma last week.  The rally has covered a lot of ground since the November lows, but that is what markets do.  The duration and size of gains are less than other rally legs over the last few years, so by that metric this bull is only  middle-aged.

Friday’s employment report is a major mile-marker and has the potential to wreck this rally.  Most would assume I’m referring to a horrible number that takes us down, but so far this market has proven immune to bad news,  even swallowing a negative GDP report without skipping a beat.  What is more likely to kill this rally is blow-out numbers sending the last of the holdouts scrambling for stock and finally exhausting supply of available buyers. Hitting 1575 over the next few days is more likely to kill this market than another dip to support. Markets often top on good news and a great employment report could be that news.

TRADING OPPORTUNITIES

Expected Outcome:
Expect volatility around employment, but there is greater upside potential than downside.  Last week flushed out most weak holders and buyers that bought in the face of weakness are far harder to rattle.  Current holders proved they will not impulsively rush for the exits and that confidence puts a floor under the market.  On the other side, a strong report will sent shorts scurrying for cover and convince holdouts to chase this market with both hands.  This will finally be our signal to get out.

Alternate Outcome:
Just because previous episodes of bad news didn’t crash this market doesn’t mean it is completely immune from shocking and unexpected news.  The key to breaking this market will be sending it sharply through previous support, triggering a massive wave of panic selling.  This is not a likely outcome given the market’s resilience to swift selling last week, but the higher we go, the more real this risk becomes.  As always, stick with our trailing-stops and don’t fight the tape if it is going against us.  Another dip under 1500 likely kills this rally leg.

INDIVIDUAL STOCKS

AAPL gave up half of Tuesday’s gains when new buyers failed to show up and support the rebound.  The stock is still in free-fall and one day doesn’t make a bottom.  The most bullish scenario is a continued rebound to $455, a dip back to new lows creating a double-bottom, and then a slow and steady grind higher.  The less optimistic bottom is a sharper and deeper selloff leading to a ‘V’ bottom.  Either way expect new lows before this thing is done.  Whether that new low will undercut by $5 or $50 is still up in the air.

NFLX is bouncing along support at $175, but the more followed this level becomes, the greater the risk is if the stock breaks it.  A dip under $175 will likely set off a wave of stop-loss selling and send the stock back down to $160.  But this is actually bullish because it will flush out the late chasers and set the stock up for a rebound on the backs of short sellers.

Stay safe

AM: Consolidation is good

By Jani Ziedins | Intraday Analysis

AM Update

Stocks consolidate after yesterday’s breakout and AAPL struggles to find new buyers.

MARKET BEHAVIOR

Quiet morning in the markets.  We opened higher, but are trading closer to break-even by midday.

MARKET SENTIMENT

This tight trade shows neither sellers nor buyers are showing up in force and we continue consolidating recent gains.  Holders continue holding for more gains and resist the temptation to take profits.  Buyers remain hesitant to chase this market.  This is how traders behaved over the last two-months, so we should expect the current trend to continue until there is a material change in the attitude of either side of the market.

TRADING OPPORTUNITIES

Expected Outcome:
We are looking for one of two possible scenarios; consolidation supporting a continuation, or a surge higher into exhaustion.  Today’s price action supports consolidation and continuation.  Resisting the urge to break 1550 exhibits restraint as slow and steady wins the race.  Staying between 1530 and 1550 for the remainder of the week is bullish.  On the other hand if the market takes off in a frenzy of buying, lock in profits because that surge is not sustainable.  We will never be able to sell the top and the market will inevitably head higher after we sell.  The most successful traders insist the key to their success is selling too early and if it works for them, it works for us.

Alternate Outcome:
The market can breakdown at anytime and bullishness and complacency is increasing with each new high.  The high-probability trade remains higher, but even if the chances for a continuation are 75%, that means 1 out of 4 times the market will fail under these exact conditions.  75% is a great trade to take, but we need to manage downside risk because 25% still a likely outcome.  1515 is a good trailing-stop and we can move that up to 1525 once the market holds 1550.

This market is quickly running out of both upside and time.  At most there are a couple dozen ponts of upside and a few weeks left in this rally.  Its been good run since the November lows and the market needs a break.  Use this time to plan your exit.

INDIVIDUAL STOCKS

AAPL is giving back some of yesterday’s gains.  After the short-squeeze and bottom-fishing, the stock is struggling to find follow-on buyers.   Today’s pause shows just how shallow the pool of potential buyers is and why the high probability trade remains lower.

A short can use $435 as a stop-loss and target a pullback to $400.  Because this stock is so volatile and could explode higher on a news story, the safest way to play this is through options.  Right now a March 28 $420 to $400 put-spread costs ~$6 and has a max profit of $14.  The time aspect of options adds a whole new dimension to trading and can lead to some unexpected behavior before expiration.  Only do this if you are experienced with options, or alternately experiment with a small position to build experience with options.

The above option trade isn’t just for bears either.  It can be used by nervous bulls looking to buy a little insurance against further losses.  The raging bull could further offset the cost of the insurance if he sold two puts at $400 if he is convinced he wants to buy even more AAPL if it falls to $400.  I’m not recommending this trade, just offering it up as a creative way for bulls to manage their position.

Stay safe

PM: Sell the breakout?

By Jani Ziedins | End of Day Analysis

PM Update

New highs, but everyone is still waiting for the pullback.  AAPL finally bounced after selling off for 12 of the last 15-days

MARKET BEHAVIOR

Stocks launched ahead 1% and finished at fresh 52-week highs.  The interesting thing is stocks traded mostly flat after 11am , neither selling off nor adding to early gains.  Volume was higher than yesterday, but still only average.

MARKET SENTIMENT

I don’t follow the Dow because it is a poorly constructed index, but the media and non-investing public does, making it noteworthy from a broad sentiment standpoint.  The Dow set an all-time high today, eclipsing the old record from 2007 and is the first major index to achieve this momentous milestone.  The Financial Meltdown is officially history and this is a significant step in healing the emotional wounds scarring an entire generation of investors.  But this is a multi-year story and it will play out over the next decade as these shell-shocked investors start wading back into equities.

A lot of traders remain reluctant to buy the new highs and are waiting for the inevitable pullback.  It didn’t happen today, but maybe tomorrow, or so the logic goes.  The truth is we will continue higher until people stop waiting for the pullback.  Right now stock holders are feeling good about themselves.  Anyone with a broadly diversified portfolio is sitting on profits and are eagerly awaiting additional gains.  Traders out of the market are feeling the pinch as they wait in vain for the breakdown that still hasn’t happened .  Obviously no one want to chase a breakout to new highs, but how much longer can they watch the market go without them?

While the last three-days of gains were decisive, they came on low-volume.  This rally isn’t a story of frenzied buying, but scarce supply as holders are not interested in selling.  Sometimes low-volume is a warning sign, others it signals a continuation.  After repeated low-volume rebounds to new highs, I don’t need to tell you which one applies here.  Right now the savvy trader is embracing the low-volume rally and fearing the high-volume surge.  When the crowd finally rushes to buy, we will take our cue to exit.

TRADING OPPORTUNITIES

Expected Outcome:
The market can do two things here, surge higher or pullback and consolidate gains.  The surge will be the last gasps of this rally before it collapses in exhaustion.  A dip tomorrow and sideways trade through the remainder of the week signals a more sustainable continuation.  We will see more chasing going into quarter end, meaning there are still a few weeks left in this rally, but we could see a couple of days of weakness first.

Alternate Outcome:
We came a long way and a lot of people are long this market.  Last week’s pullback likely put in the left shoulder of a head-and-shoulder pattern, meaning we are getting close to the top of this move.  While I don’t think today set the top of the head, we still need to honor out trailing stops to keep us from riding a winner back into the dirt. Selling  last week took some downside volatility out of the market and while a dip to 1525 is reasonable, falling under 1515 is more worrisome and a good place to set a trailing stop.

INDIVIDUAL STOCKS

AAPL bounced nicely and recovered a couple percent of the recent selloff.  While the bounce is interesting, buying it is still catching a falling knife.  12 of the last 15-days were negative and the stock shed over 10% in three-weeks.  The stock continues making lower-lows and lower-highs and is not a worthy buy candidate until it breaks this trend and finally makes a higher-high.  There is a minor high at $455 and a more meaningful high at $485.

Today’s bounce could continue higher on broad market strength, but the trend remains lower.  The market often moves in a direction that will humiliate the greatest number of traders.  It seems today’s bounce brought relief, meaning the pain trade remains lower.  The selloff will likely continue until AAPL is the most hated stock and everyone is embarased to admit they still own it.  We are not there yet.  It is a great company, the problem is no one is interested in buying the stock.

Stay safe

AM: New all time highs on the Dow

By Jani Ziedins | Intraday Analysis

AM Update

All-time highs on the Dow, 52-week highs on the S&P500 and AAPL bounced back from recent selling.  All is well in the world for the time being.

MARKET BEHAVIOR

The market gaped above 1530 at the open and marched on through 1540 by mid-morning.

MARKET SENTIMENT

A lot of fanfare over the Dow setting a new all-time high and no doubt that headline will be repeated through non-financial news outlets.  This is another big step in overcoming the average Joe’s aversion to equities.  This is not a switch, but over time the market will seem less risky the higher it goes and the gentle thaw will bring a steady stream of new investment over coming years.  The best time to buy-and-hold is when everyone says buy-and-hold is dead.  We will still see brutal selloffs and even bear markets, but in the 100-year history of the markets, each period of 10+ years of stagnant trade was followed by powerful secular bull markets.

Back to the present, we saw a modest short-squeeze this morning, but the breakout is still relatively contained.  We are concerned about excessive and unsustainable buying leading to an exhaustion top.  As explained in previous posts, this market will top on good news, not bad, and we need to watch big up-days with suspicion.  Today’s 1% gain is nothing to worry about by itself, but if we string three of them together, that is noteworthy.  We are still looking for the biggest up-week since the rally began to signal chasing is getting out of hand.

If big gains are unsustainable, a slow grind higher is.  If we keep inching higher with intermediate pullbacks, that shows cynicism is alive and well.  The holdouts are the ones that keep pushing this market higher and the longer they resist, the longer this rally will last.

TRADING OPPORTUNITIES

Expected Outcome:
Keep holding what is working.  If a person wanted to, they could raise their stop to 1515 after today’s gains.  We might see the market dip and consolidate these new levels, but a healthy market should hold above 1525.  The extra 10-points margin gives a little cushion so a trader doesn’t get shaken out prematurely.

1550 is the next stop.  If we pick that up tomorrow, the rate of gains are getting aggressive and should raise a warning flag.  If we trade sideways between 1530 and 1550 for the remainder of the week, that will clear the way for more gains.  We already came 40-points in the last four-trading sessions, so a pause here is normal, health  and expected.

Alternate Outcome:
The last four-day pop is aggressive and pushing us closer to exhaustion.  The low-volume over the las few days shows buying isn’t getting out of hand yet, but everyone knows the market goes two-steps forward, one back, so locking in today’s gains is not a bad idea.  We’re in this to make money and they only way to do that is by selling winners.

INDIVIDUAL STOCKS

AAPL holders are breathing a sigh of relief as the stock regained most of the last two-days of selling, but it is still under the previous lows of $437.  No doubt a lot of late shorts are running for cover in this short-squeeze.  There is no news so the pop is largely driven by supply and demand.  The bigger question is if more buyers will follow the short-squeeze and dip-buying frenzy?  If not, this will be just one of many bounces on the way lower.

The key level to watch is $437 and closing above it shows this bounce can go a bit further, but bumping its head on resistance at $437 makes an interesting short entry with a stop just above $437.  $5 of risk for $30 reward is not a bad trade.  Of course AAPL is a highly emotional stock and it could easily gap $15 higher overnight, blowing well past a stop-loss, so this position should only be made by savvy traders using an appropriately sized position.  The other way to manage and define risk is buying a put-spread.

Previously I said we need a ‘V’ bottom to send a wave of panic through the investor base and finally create a bottom to this selloff.  Two-days and a few percent decline doesn’t count as a ‘V’ bottom because it didn’t trigger that huge wave of emotional and irrational selling that flushes out all hope remaining in the stock.  The last couple days of selling were barely average and we need to see huge volumes of selling to form a capitulation bottom.

Stay safe

PM: Strength continues

By Jani Ziedins | End of Day Analysis

PM Update

The market is within a hair of new highs and another short-squeeze all while AAPL is setting new lows.

MARKET BEHAVIOR

Stocks closed above 1525 for the first time since setting a new high back on Feb 19th.  We sold off early, but recovered and finished up 0.5%.  This strength is putting recent volatility and weakness in the rearview mirror.  Volume was below average and the lowest since Feb 22nd’s short-lived bounce.   Everyone is watching the highs at 1531 and crossing that threshold is about as certain as anything in the markets can be.  The question is what happens after.

MARKET SENTIMENT

Cynics are finding it harder and harder to resist this market.  There are countless reasons to breakdown but it keeps defying gravity.  This comeback kid is making everyone feel safer and formerly hesitant buyers are finally coming around.  But the real story is confident holders staying put in the face of volatility and weakness.  A lot of critics point to these low-volume rallies, but we continue rising on tight supply, not strong demand.  Contrary to popular opinion, tight supply is sustainable and is why the widely expected pullback remains MIA two-months later.  In fact, high-volume is something to be feared at this stage in the rally because it shows we are consuming remaining demand at an unsustainable pace.

TRADING OPPORTUNITIES

Expected Outcome:
Being so close to new highs, expect most stock owners to keep holding for further gains and supply to remain tight.  Once we breakout, look for the short-squeeze to add fuel to the fire and most likely push us through 1540.  From there it will be a question of profit taking versus chasing.

We are getting close enough to the end of the quarter that many money managers can no longer wait for the expected pullback.  They will start chasing this market so they don’t have to explain to their investors why they missed this strong market.

Alternate Outcome:
This market came a long way and we get closer to the end of this run with each passing day.  The high-probability trade remains sticking with the rally, but we always need to cover our backside just in case.  The market is moving along nicely, but the nearest stop-loss is back at 1500.  Climbing a bit higher will let us move the stop-loss, but for now we have to deal with this extra exposure.  This makes initiating a new position more risky because it is harder to use a tight stop.  The time to buy the market was breaking through 1500.

INDIVIDUAL STOCKS

On a day where the indexes are flirting with new highs, AAPL carved out a fresh 52-week low as the value stock that cannot go any lower keeps going lower.  AAPL is stepping down in $10 increments and today’s dip took us from $430 to $420.  Anyone stubbornly trading this stock on fundamentals is ignoring reality here.  It was a great buy at $600, then $500, and now it will likely test $400 in coming days.

The real problem for AAPL is being over-owned and there are no new buyers interested no matter how cheap it gets.  Regardless of how great the company, if no one wants to buy the stock it will continue sliding.  All the value investors out there need to ask themselves if they are willing to hold through a dip to $350 because this level is not out of the question.  A lot of high-fliers correct 50% and in spite of all the hype and fanfare, the same rules apply to AAPL too.

As for shorts, look for a dip to $400, but don’t get too greedy because we could see a bounce at $400.  Look to re-short the stock when breaks $400 if the bounce fails.  Of course if the stock starts imploding, hold it through $400, but be ready to lock in profits because it will be setting up a sharp ‘V’ bottom once the last of the hopeful have been forced out.

Stay safe

AM: Constructive consolidation

By Jani Ziedins | Intraday Analysis

AM Update

Stocks are consolidating after the recent bounce, but holders keep holding and the rally remains intact.  AAPL is making new lows because it cannot find new buyers.

MARKET BEHAVIOR

Stocks opened modestly lower, and are trading around this level by midday.  Tight trade after the last 10-days of volatility is constructive and supportive of these levels.  The 50dma is catching up and the sideways trade let the market rest for its next move higher.

MARKET SENTIMENT

Holders are happy with their positions and not selling, supporting last week’s rebound.  As we’ve seen over last few months, the biggest hurdle isn’t selling, but lack of buying.  Those out of the market remain skeptical and are waiting for this market to breakdown in the widely expected pullback.  But since holders are so comfortable holding, that breakdown hasn’t happened and the market inches higher on tight supply, not widespread demand.

Bears have stop-losses above 1530 and breaking this level will trigger a wave of short-covering.  This pop will further add to the pain underweight investors are feeling.  There are few emotions more persuasive than watching everyone else make money.  This is why smart people throw caution and reason out the window when chasing bubbles to unsustainable heights.  I’m not suggesting this is a bubble, just using that example to show the power the crowd has in winning over reluctant investors.  The higher this rally goes, the harder it is for cynics to resist and that eroding base of pessimists keeps pushing the market higher.

Between confident holders holding and former cynics joining the rally bandwagon, the rally has the perfect recipe for a continuation.  As we’ve seen multiple times, headlines don’t mean anything to this market and we shouldn’t expect negative headlines to break this market.  We all know markets top, but if this one won’t top on bad news, what is left?  Good news.  As crazy as this sounds, I expect this market will top on good news.  Remember, fundamentals and technicals don’t determine market prices, only supply and demand.  What happens is the final piece of good news wins over the last holdouts and we push higher on their buying.  The problem arises when the last holdouts buy the good news there is no one left to keep pushing prices higher and the market finally rolls over.

Of course the other hurdle this market faces is the end of the quarter.  Money managers underweight and trailing the market will be forced to buy in to quarter’s end.  Even if they cannot catch up, they want to at least show their investors they have all the rights stocks in their quarterly position report.  Because of this window-dressing, look for strong stocks to continue going up and weak stocks to keep selling off.

TRADING OPPORTUNITIES

Expected Outcome:
Today’s support shows very little profit-taking and stock owners holding out for more gains will keep supply tight.  New highs are just a few points away and breaking this level will trigger another short-squeeze.  Look for the market to continue into 1540 when chasing will put 1550 in play.

Fear a strong surge fo buying more than a bad headline.  This market will fail on optimism, not the pessimism that has so far failed to dent the rally.

Alternate Outcome:
This choppy sideways trade could be a ploy to suck in the last buyers.  Tops are often volatile as power shifts from Bulls to Bears and we certainly have that volatility.  While there is often one last push higher to create a double-top or head-and-shoulders, it isn’t required.  The best way to protect ourselves is stick to our stop-losses.  While the market has bounced several times off of support, each further test is more likely to fail.  Double-bottoms are common, tripple-bottoms not so much.  1500 is the level we need to watch and failing to hold it will be a big red flag.  In the meantime swings of 5 and 10 points can be ignored because this is the market consolidating and building a base for a move higher.

INDIVIDUAL STOCKS

AAPL is selling off, creating new 52-week lows.  There are rumors of an iWatch, iTV, dividends, buybacks, and stock splits, but that doesn’t save the stock from its core problem, too many hopeful holders.  Everyone loves AAPL and already owns as much as they can.  If it’s a buy at $550, it’s a steal at $450.   But this is why it is having such a hard time finding new buyers.  When you have a huge pool of holder and small pool of potential buyers, there is little place to go but down.

The problem with a large group of holders is they are just a few dollars away from becoming sellers.  Breaking support and creating new lows is challenging holders resolve and many are giving in.  There are many reasons to own this stock, but any holder needs to be willing to see the stock continue lower in the near-term.  For the swing-trader, continue pressing the short and look for $400 over the next few weeks.  I would be reluctant to keep a short past quarter end since the trade will likely take on a new personality after the mass exodus of fund managers tapers off.

Stay safe

LA: Look for new highs

By Jani Ziedins | Weekly Analysis

Look Ahead

The market clearly wants to go higher, but stay vigilant because the next dip is less likely to bounce.  Look for AAPL’s weakness to persist as money managers dump shares before the end of the quarter.

MARKET BEHAVIOR

The market finished within 1% of a 52-week high in spite of several down-days that tried to break the market.  Weekly volume was above average, not surprising given the volatility.

MARKET SENTIMENT

Last week’s violation of major support at 1500 gave the market every excuse to breakdown, but rather than trigger a larger wave of panic selling, the dip ran out of supply and prices snapped back.  This behavior is extremely insightful for understanding what the market is thinking.  Obviously we had an initial wave of sellers crowding the exits, but no one else followed their lead and soon after the selling stopped.  When the market finally bounced back, holders were rewarded for holding and sellers were humiliated for being impulsive.

This strength is emboldening bulls and humbling bears.  We can take two things from this.  First, holders are more confident and less willing to sell because in their mind every dip bounces.  This keeps supply tight, reduces volatility, and supports price increases.  Second, when the market does dip again, this will be the real thing.  If everyone is holding the dip, yet we are still going down, that means we ran out of buyers and the music has stopped.

TRADING OPPORTUNITIES

Expected Outcome:
Stay long and look for new highs.  The recent shakeout refreshed the market and 1550 is expected and all time highs at 1575 is within reach.  But be wary of any breakdowns because they will be less likely to bounce.  Falling under 1500 shows this market lacks follow-on buying and makes for a stop-loss of last resort.    If we keep making new highs, use a trailing stop to protect gains.  For example, if the market hits 1540, move the stop up to 1520.

Alternate Outcome:
Last week’s price action was extremely bullish, but there are no guarantees and the market could turn lower at any moment.  Give the market some room to move around and digest recent gains, but if dip buyers fail to show up near 1500, they are not coming and we need to get out.  Markets can only bounce so many times before they run out of support and break lower.  The trend is higher and that is the high-probability trade, but always cover our backside.

INDIVIDUAL STOCKS

With just a few weeks left in the quarter, AAPL is running out of time to bounce and save overweight managers.  When portfolio managers become convinced AAPL will not bounce back by the end of the quarter, they will sell ahead of quarter-end so they don’t look foolish being overweight AAPL.  Expect this window-dressing to keep weighing on the stock in coming weeks. But what starts as window-dressing will likely devolve into wider selling as the market dips under stop-losses and flushes out holders who cannot handle any more pain.  This will likely push AAPL to $400 over the next couple weeks.

A steep selloff without a legitimate fundamental catalyst says the stock is finally reaching capitulation.  This will be the ‘V’ bottom that finally put a floor under the stock.  The lack of a fundamental driver means it is a sentiment based move and is finally showing a change in investor attitudes.  But if the stock continues grinding lower, that is more worrisome because grinding bottoms are longer and deeper.  The goal is extinguishing all hope and a slow grind lower means holders are still stubbornly holding on and refusing to let go.  This is like pulling a band-aid, quick is usually better than slow.

ET CETERA

I receive a lot of compliments for this blog and I want to thank everyone for their support and encouragement.  I created a new tab to showcase all the kind words people share and I want everyone to know how much I appreciate it.  Thank you.

Stay safe

WR: Rally wins another one

By Jani Ziedins | Intraday Analysis

Weekly Review

Stocks bounced back from a volatile week and I pissed off a lot of people when I suggested MSFT is out innovating AAPL.

MARKET BEHAVIOR

The market closed the week higher by three-points, but only after some dramatic downside volatility.  The 10wma is within 27-points and we bounced of this key moving average in intra-week trade.  The weekly range was the largest since the Fiscal Cliff pop as the debate between bears and bulls intensifies.

MARKET SENTIMENT

If there was a week for the selloff to finally take hold, this was the week.  We sliced through support at 1500 and bears were after blood.  But much to everyone’s surprise, the market snapped back and regained all the weekly losses in another example of the obvious trade being the wrong trade.  No doubt the market could break wide-open at any moment, but to see it run out of sellers and bounce back so quickly speaks volumes about where this market wants to go.

Recent volatility eliminated any complacency and flushed out most weak holders.  Sellers sold because everyone else was selling, which is common in a herd-style selloff, but we are more interested in the people buying the dip.  These investors are willing to step in front of a freight train and absorb near-term losses because they believe this market is headed higher longer-term.  The most noteworthy trait of these holders is they are not spooked by minor dips and are more than willing to hold through some volatility.  What this means for us is these holders don’t panic and run for the exits at the first signs of weakness and their willingness to hold through volatility actually eliminates volatility because they keep supply off the market.

TRADING OPPORTUNITIES

Expected Outcome:
When in doubt, stick with the trend.  Any weakness over the last two-months has been a buying opportunity and that trend continues.  News cannot bring this market down and any headline-induced dip has been a buying opportunity.  Without a doubt this market will top, but it isn’t ready yet.

Alternate Outcome:
This Teflon market wants to go higher, but is the rally getting too obvious?  Once everyone buys into it we will run out of new money to keep pushing prices higher.  I don’t think we are there yet, but I don’t have a crystal ball and stop-losses protect us from ourselves.  1500 is the line in the sand and another break in the near-term shows this market is running out of traders willing to buy the dip.  I still expect new highs over the next few weeks, but a dip under 1500 invalidates the bull thesis.

INDIVIDUAL STOCKS

Wow did I strike a nerve when I suggested MSFT was out innovating AAPL.  Quite a few people took offense and let me know about it.  At my core I’m a contrarian and when everyone is defending AAPL and ridiculing MSFT, that warrants a closer look.   I am the first to admit I could be wrong, but I am fairly certain MSFT will trade $60 long before AAPL sees $900.  Feel free to disagree because that is what makes markets.

Just to give people perspective on where I am coming from, I was the guy using dialup modems in the 80s call to bulletin boards, I was emailing friends in Europe in the early 90s, I used Netscape Navigator before most people even heard of the internet, I was using Yahoo when it was still hosted on Standford.edu, I had a “HoTMaiL” account long before most people knew what email was, I watched Steve Jobs unveil the original iPhone live on the internet, and I run Linux on my laptop because it is a great operating system that makes old computers new again.  While I’m not a hardcore technology pioneer, I’m certainly an early adopter.  Now I’m stereotyping here, but who has a better idea where technology is headed, someone like myself or some gray-haired investor who bought his first AAPL product a couple of years ago?

As I said, I could easily be wrong because nothing is certain in the markets, but I see real potential in MSFT and am impressed with the direction the company is headed.  Win8 and the SurfacePro have bugs, but everyone forgets what an overpriced piece of junk the original iPhone was.  I am also old enough to remember how ruthless MSFT is in showing up late and crushing the competition.  They don’t need to be the best; just good enough and I think they are more than good enough here.  Plus as a long-time Apple customer, I am becoming more and more dissatisfied with how controlling they are and am irritated with their constant dumbing down of OS X and iOS.  I want to write a lot about this subject, but will continue this discussion another time.

As for sharing these controversial ideas, I have a choice, I can say what people want to hear, which is what the popular gurus do, or I can step on toes and tell people what is really happening.  I’m not in this to make friends; I’m here to share the best investing ideas and insights and will keep doing that no matter how unpopular it is.  As always please feel free to disagree because I will be the first to admit I don’t know everything.

Stay safe