All Posts by Jani Ziedins

AM: Where are we going?

By Jani Ziedins | Intraday Analysis

AM Update

Stock are down and retesting 1550 after yesterday’s rebound.  AAPL is oblivious to market weakness and higher on hopes of a rebound.

MARKET BEHAVIOR

Stocks opened lower and are retesting support at 1550.  The market is on track for four out of five down days, but even with all the selling, the market has not lost much ground.  Either this is supportive of a continuation, or the ground eroding under our feet.  Our job is figuring out which and how to trade it.

MARKET BEHAVIOR

The market is doing its best to abuse both bulls and bears with these head fakes and it is doing a good job.  We make new highs, then break down, only to rebound again.  A trader reacting to these moves is getting killed because this whipsaw volatility leads to buying and selling at the wrong times.

Tops and bottoms are some of the most erratic periods because this is where bulls and bears are on equal footing.  The dominant side is losing its grip and the underdog is coming on strong.   While the top will be identified as a single day, the process takes months to complete.  If this is a top, it started last month with the drop to the 50dma.  Most rallies do not end on their first dip and that was the case here as the market rebounded decisively to new highs.  But as this process continues, each rebound is less and less powerful, eventually ending on the dip that doesn’t bounce.

Currently we are building and testing support at 1550, just a few ponts shy of all-time highs.  Everyone expects us to take out these highs and that is why we struggle to get there.  Traders who normally wait the breakout bought early in anticipation.   Bears are not shorting because they are waiting for new highs first. Everyone is mostly just waiting around and that is why we are not moving and volume is so light.

To figure out where the market is going we need to understand what other people are thinking and how they are positioned.  If most bulls are in ahead of the expected breakout, the actual breakout will not trigger a wave of buying because everyone is already in.   If shorts are holding back until we make these new highs, a breakout will actually be greeted by a wave of shorting and profit taking.

I’ve been waiting for a high-volume surge to signal an exhaustion top, but the way the market is set up here, I don’t know if we will get there.  Rather than end with a bang, this rally leg could exit on a whimper.    The bang ending requires a pool of reluctant buyers chasing in the final moments, but it feels like many of them are already in the market and there is no one left to power the chase higher.

INVESTING OPPORTUNITIES

Expected Outcome:
There is little reason to own this market.  Most of the upside has already been realized and a lot downside is underneath us.  The trend remains higher, so it is a risky short the market, but that does look to be the next high-probability, high-profit trade.

Alternate Outcome:
This will be the third year in a row the markets top in the April.  I like the precedent, but I worry about the predictability.  The market hates being predictable and is this too much?  I would be more worried if talking heads were making a big deal out of it, but so far it is not getting much coverage.  People are talking about pullbacks, but each bounce back quiets the pessimistic commentary.   I have no idea what will happen next, but I do see the odds stacked against a continuation. But even if the chances for a pullback are 80%, that means one time out of five this rally will continue higher.  Low-probability or not, we need to watch for the continuation and buy it when it invalidates our previous analysis.

INDIVIDUAL STOCKS

What do you know, AAPL is up when the market is down.  This stock is operating in a world of its own and AAPL traders have such intense tunnel vision they don’t see, nor care about what is going on around them.  The benefit for the bull is even if the broad market sells off, AAPL could surge higher on a break of the 50dma as traders chase the rebound.  But if people are buying the stock strictly for technical reasons, expect them to sell for technical reasons too, likely running into resistance near $485/$500.  Enter and exit a technical trade on technical levels.  Enter and exit a fundamental trade on fundamental data.  This story is still missing the fundamental catalyst necessary to reclaim much higher levels, so don’t let a technical bounce convince us to hold for larger gains when this will most likely be a temporary bounce.

Stay safe

PM: Rally on

By Jani Ziedins | End of Day Analysis

PM Update

Markets shook off previous worries and have their sights set on all-time highs again.  AAPL could not hang with the market and continues struggling with the 50dma.

MARKET BEHAVIOR

Markets bounced back from Cyprus induced weakness and closed less than 10-points from the all-time closing record.  Volume was lighter than yesterday’s selloff and continues the trend of below average trade.

MARKET SENTIMENT

This market is persistent.  No matter what headline is thrown at it, it bounces back hardly missing a beat.  Of all the bad news this rally shrugged off, it was unlikely it would be taken down by banking problems in a tiny island most didn’t even know was part of the Euro Zone.  Today’s rebound confirms most traders either don’t care or assume it will be resolved without wider implications.  Right or wrong, we trade the market and this is what it thinks about Cyprus.

Resilience in the face of countless negative headlines shows just how committed holders have become.  They are stubbornly holding for more gains no matter what they say on CNBC or write in the WSJ.  Their holding is the source of the light volume, if holders are not selling, there is nothing to trade.

Today’s flat trade after the opening gap is also telling.  It shows shorts were not driven from this market in the typical relentlessly climbing short-squeeze.  Either shorts are confidently holding on, or they just aren’t there.  Given the lack of recent short-squeezes triggered by new highs and unexpectedly bullish employment news indicates most bears have either changed sides and joined the bull bandwagon or given up and gone home.   Either way this is a significant shift in sentiment and trader positioning.

Bouncing back from Cyprus is just one more reason for bulls to relax and enjoy the ride.  This market is gaining wide recognition as the rally that just won’t quit and no one needs to worry about anything because everything is under control.  And that is exactly what I am afraid of.

TRADING OPPORTUNITIES

Expected Outcome:
The rally remains intact.  I can’t tell you if we will see 5, 10, 25 or 50 points of upside from here, but I suspect it will be on the lower end of the range.  This market has become too easy for bulls and obvious for the casual observer.  It has also beat bears into submission to the point where they are not even trying anymore.  At this point it is hard to imagine people becoming even more bullish on this market and the last of the buyers are finally streaming in.

1565 and 1576 are the levels everyone is watching and I actually wonder if we will see a wave of selling hit the markets at those levels since there are so few left to buy the breakout.  It will be interesting to watch how the market responds to these levels, assuming we get there.

The high-probability trade remains sitting this one out and waiting for the next trade, likely shorting the completion of this head-and-shoulders pattern.  I wonder if sell in May comes early this year and if we fall to 1400, we could actually see a Summer rally this year.

Alternate Outcome:
This market could continue higher if the new-high headlines hit Main Street and triggers an influx of new investment from the general public.  While this will happen over time, it won’t occur at a rate high enough to affect the near-term trade.  The great rotation out of bonds and other secure investments into equities will take many years and will drive a secular bull market, but it will not be enough to avert the normal dips, pullbacks, and corrections every market experiences.

While I am out of the market waiting to get short, I will watch for strength carrying over into the second quarter.  I will consider going long again if it looks like there is more sustainable support and strength left in this market, but it will have to prove it to me first.

INDIVIDUAL STOCKS

AAPL didn’t share in the markets good day, but that’s nothing new since AAPL disconnected from the market months ago.  Without a doubt this stock will find a bottom.  Have we already passed that point, or are we standing on another trapdoor?  We can actually start thinking about Q1 earnings because that is the next major catalyst guaranteed to happen.  Dividend/buyback/product launch might or might not happen and we can’t plan on these events.  It seems Q1 and Q2 expectations have been ratcheted down a fair bit, but that is likely offset by the high level of optimism remaining in the stock.

For a trade, if the stock cannot reclaim the 50dma, there is little support for a continuation and expect lower prices.  If the stock breaks above the 50dma, it will be a major milestone and look for swing, momentum, and dip buyers to flood the stock trying to make a quick buck.  But these traders are not loyal to the company and will bail after a $20-$40 move.  We should do the same because there is a monumental supply of regretful owners that are praying to get out at break-even and this will slow any potential rebound.

Stay safe

AM: Cyprus who?

By Jani Ziedins | Intraday Analysis

AM Update

Stocks recover from Cyprus fears, but is the coast clear?  AAPL is struggling with the 50dma and is building a trade one way or the other.

MARKET BEHAVIOR

Stocks bounced back from Cyprus weakness and are solidly above 1550 this morning.

MARKET SENTIMENT

Europe is a three-year old story and if it hasn’t crashed the global economy yet, it probably won’t.  Our historic 2008 financial implosion occurred over a period of months and if Europe has limped this far, they will likely pull out of it.  This Cyprus stuff is largely noise.  We survived Greece which is 10x the size, so Cyprus is simply a bump in the road.  The biggest concern isn’t the size of the bailout, but the precedent a savings account tax sets.  There is a bit of hubris at the ECB and the biggest problem is the way they presented this bailout.  Instead of calling it a tax, the should have approached Cyprus depositors and said “Your bank is about to go bankrupt and you will lose everything.  The ECB will step in and bailout out your bank if you are willing to pay 10% fee.  If you chose not to pay the fee, you will likely lose everything.”  Phrased that way it is hard to argue with them and most would be grateful the ECB ‘saved’ them instead of the outrage we are currently seeing.  Presentation and perception is everything.

The rebound from Cyprus selling shows the market is less worried about a domino effect and fear based selling has largely dried up.  We can now add Cyprus to the long list of bad news the market shrugged off.  This teflon rally is immune to headlines and it is unlikely one will take down this market.  Instead we need to watch for a diminishing supply of available buyers.

Markets top for one of two reasons, a wave of selling or an absence of buying.  Holders have repeatedly  proven how comfortable they are at holding through weakness and this prevented negative headlines from crashing the market.  Today’s rebound further reinforces this stubborn holding behavior.  The next question becomes how much buying is left because that is what will finally kill this rally.

Shorts are largely absent as demonstrated by the lack of meaningful short-squeezes on good news, new highs, and reversals.  If shorts are absent and bears less vocal, this is a major shift in sentiment and likely shows many cynics have joined the rally bandwagon.  As a contrarian there is nothing as unnerving watching the critics disappear.

TRADING OPPORTUNITIES

Expected Outcome:
The market is within 10-points of all-time closing highs and it seems likely the relief rally will push us through this level.  But rather than be a bullish breakout, this minor double-top could very well be the end of the rally.  Everyone knows rallies cannot last forever, meaning one of these upcoming dips is not going to bounce.  The impending rollover to the second quarter will give institutional investors a clean slate and often they approach the next quarter with a different strategy than the one that just closed.

The conservative trade remains sitting out this volatility.  At this point there is limited upside and a lot of downside, so the only real trade is waiting for a good short entry.

Alternate Outcome:
This might simply be another dip on the way higher.  Holding for more gains is getting a tad greedy, but further upside is something we still need to watch for.  Continued strength into the 2nd quarter invalidates a large portion of my bearish thesis and will be a signal to reevaluate the current market for more upside.  The current trading range is somewhere between 1550 and 1576.  If we hold this level for a while, time instead of pulling back will refresh the market and set the groundwork for a continuation.

INDIVIDUAL STOCKS

AAPL is not sharing in the markets good day.  The 50dma is providing significant resistance and it is not surprising since the stock was $650 the last time it traded above the 50.  But this can cut either way.  Rebuffed at the 50 likely means we will see new lows in the near-future.  Break the 50 and it will trigger a large wave of short covering and momentum buying.  Remember, even if the stock breaks out, this is just a trade and lock-in profits in the upper $400s because $500 will provide a significant level of overhead resistance as underwater traders try to get their money back.

Stay safe

PM: Three days in a row

By Jani Ziedins | End of Day Analysis

PM Update

Stocks weakness continues.  Is this the end of the run?  AAPL is trading well for a change, what should we expect?

MARKET BEHAVIOR

Stocks closed under 1550 for the first time in nearly two-weeks and extended the losing streak to three-days.  The market finished down a modest quarter-percent, but that overlooks the wide intraday range that briefly dipped to 1538.  It will be interesting to watch 1550 in coming days to see if previous support turns into overhead resistance. Today’s selling finally registered above average volume, only the second day in over a week to trade elevated levels, but 5% above average is hardly panic levels.

MARKET SENTIMENT

This is the first time the market traded down three-days in a row this year and signals a potential shift in personality.  Previous dips rebounded with an exclamation point, yet it seems this selloff is picking up speed.  While the rally is not dead, a change in behavior is noteworthy.

We’ve been watching a potential head-and-shoulder top develop over the last few weeks.  A retreat under 1500 could bounce and form the right shoulder before continuing lower.  If, and this is a big if, we are in a H&S top, expect the market to slide as far as the 200dma and a return to 1400 would be a fairly typical 10% pullback.  I have no idea if the market will reach these levels, but it is certainly worth knowing what the downside risks are.

Recent volume is telling as both rallies and dips have been on unusually light volume.  The restrained trade shows holders continue holding no matter what direction we go.  This scarce supply is driving prices higher instead of the more typical strong demand.  Selloffs have also been limited because few holders are dumping shares in market weakness.  Holding through every dip this year has been rewarded with new highs and traders have been conditioned to wait for inevitable rebound.

TRADING OPPORTUNITIES

Expected Outcome:
1550 is the key level to watch.  Closing above this levels likely means we will finally takeout all time highs at 1565, but that is not a sign of strength, simply delaying the inevitable.  A lot of traders are comfortable with this rally, as seen by the lack of elevated selling into recent weakness.  Many have been lulled into complacency because every other dip bounced back, but there is always that final dip that doesn’t bounce and we are closer than ever to it.

The conservative trade remains sitting in cash. It’s been a great few months and the only way to win this game is locking in worth-while profits.  The aggressive trader is looking for a short entry.  A short here with a stop around 1555 sets up an attractive risk/reward.  Seven points of risk to at least 50-points of profit.  This trade has both high-probability and favorable risk/reward on its side.   Nothing is guaranteed in the markets, but it is hard to beat this setup.  If we are early, take our 7-point loss and keep looking for the next opportunity.

Alternate Outcome:
Without a doubt this market will top at some point.  There are many indications this is the top, but often markets continue longer than anyone expects.  Clearly that happened as we already far exceeded calls for a pullback going all the way back to January 3rd.  There is no reason this cannot be another head fake designed to fool bears and shakeout weak traders before resuming the uptrend.

The easiest way to identify an uptrend is by obviously watching it climb higher.  Rallying to and holding 1565 shows support for this market and continued strength into the 2nd quarter will invalidate many of my justifications for selling here.  The single greatest strength we have as individual investor is our ability to jump in and out of the market as conditions warrant.   If we sit through dips we give up the only advantage we have in this game.

INDIVIDUAL STOCKS

AAPL hit its head on the 50dma, but managed to contain losses to just a quarter-percent.  Not a bad day given the size of losses we’ve seen in recent history.  Greg pointed out an interesting observation in the comments from this morning’s post that all of AAPL’s weekly closes have been at the extremes of the market’s range.  The “pain trade” as he insightfully pointed out.  We have to go back two-months before finding a week where we closed in the middle of the range.  There is no telling how far this pattern will continue, but it could provide interesting insight into trading weekly moves.  This week is shaping up as another rally week and a break above the 50dma make for an interesting swing-trade, but if we see a breakdown, look for the stock to test and even exceed the weekly low.

AMZN is trading poorly.  There are only so many times a stock can test the 50dma before breaking it.   The next stop is the 200dma.    The last time the stock broke under the 200dma, it took 5-months to recover it on stronger than expected earnings.  But even in the face of this weakness, I still don’t think the stock is breaking down because there are still far too many cynics and shorts.  I don’t think it makes a good trade but it is interesting to watch and talk about.

Stay safe

AM: Cannot hold 1550

By Jani Ziedins | Intraday Analysis

AM Update

Selling continues for a second day as the market fails to hold support.  AAPL hit its head on the 50dma and is down with the rest of the market.

MARKET BEHAVIOR

Stocks are struggling with support at 1550.  This is a key level that provided support the last couple weeks and failing to hold it has the sharks circling.

MARKET SENTIMENT

Today’s dip under 1550 triggered a swift wave of stop-loss selling and invited shorts to pile on.  The question is if this selling will achieve critical mass and continue lower, or bottom and rebound yet again.  Either scenario entirely plausible.   It wouldn’t be a surprise to see early bears get rebuffed for the umpteenth time as we finally take out the all-time high, but this would be the last gasp of a dying rally, not signs of unbreakable strength.   Alternately stalling 2-points shy of the record last week could easily be the top of this rally leg.  Either way we have far more down ahead of us than up.

I’m not promoting a collapse and remain constructive on the economic recovery, but markets move in a zig-zag pattern and after every period of zigging, is normal and healthy to zag.  We came a long way and this is a reasonable place to take profits and wait for the next trade.    Even the most bullish years see dips of 5 and 10% and we should expect something similar here.

There is one more piece I can add to the contrarian puzzle.  Two-weeks ago I was still behind the rally and receiving a lot of positive feedback from readers.  But since I grew more cautious and bearish, its gotten quiet around here.  I’m not doing this to be popular and am comfortable going against the current, I only point this out as yet another sign of how popular this rally has become.

TRADING OPPORTUNITIES

Expected Outcome:
One of the upcoming dips is not going to bounce, is this it or will it be the next one?  This is not an exact science and no one knows for certain where and when a market will top.  The best we can do is get close enough and call it a day.  Everything I see says this is close enough.  New highs are still on the table because market tops are often volatile and one of these swings could easily take us to new highs, but that doesn’t constitute a high-probability trade.  I’m in this to make money, not pick tops, so I’m quite pleased with how far we came and am happy to cash in here.

The aggressive trader can start looking for a good short entry, but use prudent stops and don’t stubbornly argue with the market if it moves against us.

Alternate Outcome:
Markets are never easy and it takes more luck than skill to spot a top.  Without a doubt I could be 50 or 100-points premature in selling this rally.  But just because I sold doesn’t mean I have to sit out remaining upside.  I am still looking for signs of continued strength and am more than willing to admit I pulled out too early.  The great thing about sustainable rallies is they give plenty of opportunities to get back in.  Long-term success in the markets is less about offense and comes down entirely to great defense.  The only way to make money in this game is selling winners.

INDIVIDUAL STOCKS

AAPL bumped its head on the 50dma and is selling off with the rest of the market.  Talking about AAPL is like discussing politics and religion with family, it just cannot be done without upsetting someone.  This shows just how emotionally charged this trade remains.  Neither bulls nor bears care about anything other than the data that supports their emotionally held position.  Fundamentals just don’t matter in this stock like this and it continues trading on sentiment.  It will surge on any new product rumor or cash distribution scheme and fall when follow-on buying fails to materialize.  AAPL is setting up for a great sentiment driven swing-trade, but it will be a while before this stock is investment grade again.

 

For a swing-trade, jump on a break of the 50dma and get out around $485.  AAPL has quickly gone from a Return ON Investment to a Return OF investment stock.   Most people no longer dreaming of huge profits and simply want to get out at break-even   This selling will put a lot of pressure on any rally.

Stay safe

PM: Where’s the volume?

By Jani Ziedins | End of Day Analysis

PM Update

Stocks bounced back from early weakness, but volume was noticeably absent.  What does this say about the market and where it is headed?  AAPL’s strength is impressive, but is it sustainable?

MARKET BEHAVIOR

Stocks sank at the open, the biggest drop since February 25th’s massive reversal.  As volatile as the day was, volume ended surprisingly light, 12% under average.  In spite of all the headline drama, not many people were adjusting their portfolios on the heels of Cyprus news or the market’s weakness.

MARKET BEHAVIOR

Cyprus gave the financial shows a lot to talk about, but the intraday strength and low-volume shows not many traders are worried about it.  There was an initial surge of selling, but that worked through the system in a matter of minutes, allowing the market to rally near break-even by midday.  Stocks could not hold the rebound and closed in the middle of the day’s range, but not a bad day given how much hype there was over the Cyprus deposit tax.

What does this price action tell us?  Holders are still willing to hold through both negative headlines and weakness.  At times this is a virtue and others it will get us into trouble.  Over the last few months holding volatility has been rewarded as each dip bounced back to new highs.  The difference is many of those dips were on elevated volume as traders bailed en masse, fearing it was the start of another market collapse.  This time volume is below average showing traders are no longer afraid of dips.

The market is weak and traders are indifferent, does this present a contrarian trading opportunity?  By itself that doesn’t mean much, but taken with all the other signals we received lately, it sure feels like this market is living on borrowed time.  New highs and unexpected employment strength is no longer triggering short squeezes, showing shorts are finally giving up.  The rally is four-months old and covered a respectable 16%.  We are coming up on a new quarter and potential shift in market personality.  Plus a few others we’ve covered in recent posts.  Is it different this time?  It sure feels like it.

TRADING OPPORTUNITIES

Expected Outcome:
I’ve been extremely bullish on this market from the lows in November, but there comes a time in every rally when we need to get off.  We are in this to make money and can only do that by selling our winners.  This is not trying to pick a top, but saying its been a good ride and it is time to look for the next trade.  The market could very well continue a few percent higher, but the risk/reward has changed and staying in this market no longer puts the odds in our favor.  We will continue watching the market for consolidation, signaling this market has refreshed itself and will gladly buy back in if the conditions warrant.

The aggressive trader needs to be looking for a valid short entry.  Stocks can only bounce so many times before their luck runs out and this market is pushing it.  Holders willingness to hold means when the market finally starts sliding on seemingly benign news, we have finally run out of buyers and no matter how resolute holders are, without demand prices will continue declining.

Alternate Outcome:
Each dip refreshes the market because it flushes out weak holders and creates a new pool of potential buyers.  February’s dip to the 50dma was highly productive and could be a mid-rally dip on our way to much higher highs.  But rather than blindly holding on here, we need the market to prove itself.  Recovering 1560 and holding it for a couple more days supports a continuation to all-time highs.  How much more upside is left will be determined by watching how the market’s response to the new highs.  Obviously selling off is not helpful to the continuation, but so is surging higher on large volume.  Both these scenarios show we are running out of buyers.  The most sustainable trade will be sideways consolidation while holding support.

Again the risk/reward is not in our favor here, but we need to keep an open mind that February’s dip was just the midpoint in a larger rally.  Continued strength into next quarter will be a strong indication that this rally has legs.

INDIVIDUAL STOCKS

AAPL came back to life on speculation of a dividend increase.  We heard this before, but much like a broken clock, if we wait long enough, eventually it will be right.  Tomorrow is the one-year anniversary of AAPL’s dividend and bulls are hoping it would be an ideal time to announce an increase.  Maybe it will finally happen, or maybe it is just another rumor put out by stock manipulators and embraced by desperate holders.

Does increasing the dividend address the reasons the stock is 35% off the highs?  Steve Jobs was notorious for his disdain for shareholders and the stock rallied strongly in spite of his lousy capital allocation strategy.  The real reason the stock peaked in September because it ran out of buyers.  Everyone who wanted AAPL already had as much as they could hold and there was no one left to buy.  Only after the stock started selling off did people mentioned concern over iPhone5 sales and increased competition.  These were just excuses used to justify the selloff, not the other way around.

To reverse the slide, AAPL needs to fix what lead to the selloff.  It needs is to find buyers.  As long as everyone continues defending AAPL, it means everyone still believes in the story and these people already own all AAPL they can hold.  The question any AAPL bull needs to answer is who is the next buyer?

The stock has a date with the 50dma in coming days and breaking through this technical level could lead to a wave of momentum buying, but these are traders not investors.  Expect these buyers to jump out for a quick buck when the stock comes against resistance between $485 and $500.  At best this stock ended the selloff and is entering a trading range, meaning the best trade is buying the dips and selling the rallies, but I still don’t buy it.  AAPL bulls outnumber bears by a large margin and this skewed sentiment means lower-lows are still likely.

Stay safe

AM: Fear Cyprus?

By Jani Ziedins | Intraday Analysis

AM Update

MARKET BEHAVIOR

Stocks gapped lower at the open on renewed Euro fears, but recovered a chunk of those losses by mid-morning.  We bounced off 1545 and are back above 1555.

MARKET SENTIMENT

The financial world is holding its breath over a savings account tax in a country smaller than many mid-western cities.  The rebound from opening lows shows many investors think the fear is overblown and the anxiety induced selling is reversing.  Europe has been a concern for three years and so far they managed to muddle through it without collapsing the global financial system, chances are this is just another bump on that road.  The biggest fear is Cyprus sets a wider precedent and opens the door to similar moves in Greece, Spain, and Italy.  It will be interesting to see how this story plays out over coming days and if European officials relent on their pressure for such a tax seeing how it could shatter confidence in Eurozone bank deposits.

As we discussed here many times, markets move on supply and demand, not news.  News can affect traders expectations of the future and make them change their positions, but it is this buying and selling that changes prices, not the news itself.  Why this matters is if news simply reinforces existing sentiment, it won’t move markets because no one adjusts their portfolio.  This is why markets often shrug off good or bad news to the frustration of fundamental and news based traders.

Up to this point the market ignored headlines of negative GDP, ‘socialists’ taking over in Italy, and the Sequester.  Will Cyprus really be the thing that finally upsets this teflon market?  Market participants are already doubting the significance of Cyprus and using this dip as a buying opportunity.   Buying weakness worked every other time this year, so that makes it a perfectly safe buy here, right?

TRADING OPPORTUNITIES

Expected Outcome:
While I’m not worried about Cyprus, the market is more vulnerable than it has been in months because the extended rally and assumption by many traders every dip is buyable.  By mid-day it looks like the market is finding support and this dip has not triggered a wider avalanche of selling.  This support in the face of seemingly dire headlines shows we are still in position to take out the all-time highs, but I’m not sure how much is left in the tank beyond that.  It will be interesting to watch how the day closes.  If the rebound continues and we close near flat, that will signal all clear and will make traders even more complacent about the next dip.  On the other hand, afternoon weakness will put more pressure on the markets and could signal the start of something bigger.  It’s not that Cyprus is a big deal, but it could be the final straw that breaks the camels back.

Alternate Outcome:
The market ignored far more meaningful economic news on its way to these highs, so why are we afraid some tiny island taking down the rest of the world?  If we are weighing the significance of recent developments, negative GDP headlines, arbitrary Sequester cuts, and anti-austerity leadership in Italy are far more meaningful than some Mediterranean island.  No matter what the market does from here, it won’t be because of Cyprus.  Today could easily be the start of something bigger, but we’ve laid the groundwork for a pullback it would happen with or without this nudge from Europe.   This mornings bounce shows the market is still resilient and new highs are easily within reach, depending on how we respond to those, this rally could continue to 1600 and beyond.

Stay safe

LA: Time to cash in?

By Jani Ziedins | Weekly Analysis

Look Ahead

MARKET BEHAVIOR

Stocks are on the hunt for all-time highs resting just a few points away.  The market is up an impressive 14 out of the last 17-weeks, covering nearly 220 points since the November lows.  It’s been a good run, but how much longer can this last?

MARKET SENTIMENT

16% in four-months is quite remarkable and holding for more is getting a tad greedy.  Markets made bigger moves in the past, but those were during periods of emotional extremes, either crushing depths of despair or widespread euphoria infecting the general public.  It’s hard to compare current market sentiment to either the 2009 lows or the internet bubble, so chances are this is a normal rally and will behave more traditionally.    Can we continue 1, 2, 3, 0r 4%?  Of course, but we are much closer to the end of this rally than the start.

The challenge is knowing when to hold ’em and when to fold ’em.  Often traders fold ’em too quickly when rallies are just getting started because they are still in shock from the previous correction.  Later in the rally they continue holding ’em too long because time and distance makes them forget about pullbacks.  As contrarians, we go the other way.  We continue holding when everyone doubts the sustainability of the rally and we jump out early when everyone is finally feeling comfortable.

So far the market has a decent left-shoulder and left-side of a head in a H&S pattern or alternately the second high in a double-top.  It’s always easy to spot these patterns months after the fact, but it is far more useful to see these formations develop in real-time.  There is no guarantee we are building either of these topping patterns, but there is enough to warrant caution.

Patterns are more than just lines on a chart, they show up time and time again because the consistency of human nature and herd psychology.  Markets rarely breakdown on the first attempt because too many people are still on the lookout for the correction.  They are skeptical and cynical, claiming the bounce has gone too-far, too-fast and are waiting for the previous selloff to continue.  At this stage many traders are still on the sidelines and the aggressive outright short the market, but the first dip rebounds quickly because so many people are already out of the market that there are few left to sell the weakness.  The selling quickly dries up on lack of supply.  Do this a couple of times and the cynical convert into believers.  But by the time most of the former cynics join the rally bandwagon, demand is drying up and we finally top on a lack of buying.

One of the easy rules of thumb I use is “make the hard trade”.  Most of us are normal, well-adjusted human beings, whatever that means, but more importantly what we feel is similar to other traders.  If we are reluctant to buy the market, many others feel the same way.  This means few are in the market and there is a large pool of buyers watching from the outside.  When we are reluctant to sell, it reveals others are also holding on for more gains.  If most people feel comfortable with the market, they are already invested and supply of new buyers is running out.  This isn’t perfect, but more often than not the right trade is the hard trade.

TRADING OPPORTUNITIES

Expected Outcome:
It is impossible to know exactly when a market will top, but we can get a sense of when one is more likely to top.  Obviously every rally must come to an end at some point and usually it goes further and longer than most expect, but it also tops while everyone is still holding out for higher prices. Somewhere in-between these extremes is the tipping point.  Are we there yet?  It sure feels like it.  No doubt we can continue for a few percent higher, but is another 20-points of upside worth 100-points of risk?

The market closed above 1560 Thursday and Friday.  Two more closes above 1560 shows support and the next move is likely a continuation for at least a few more points.  Failing to hold 1560 and things get more interesting.  1550 is the next level of support and no doubt a large number of stop-losses lie under this level, expect selling to pick up and challenge 1525/1530.  A lot of traders will be buying the dip because that has been the easy trade for the last several months, but in the markets things work until they don’t.  Is buying the dip obvious to everyone?  If so, expect the rebound to fail and form the right shoulder.

Alternate Outcome:
Everyone who called for a pullback the last few months has been humbled by the market’s resilience.  No doubt it could run me over too and that is why this is a good time to lock-in profits, but it is premature to sell short into strength.  Markets love to shred top-pickers, so we shouldn’t play that game.  But if the market starts showing cracks, jump on it with both hands and go for the kill.

As for a continuation, if the market dips to 1550, yet holds support, that is building a solid base to launch an assault on 1575 and possibly even 1600.  I don’t have a crystal ball and if someone is looking for definitive answers, there are plenty of snake-oil salesmen that will tell them what they want to hear.  But if someone is looking to trade more intelligently, I think we laid out a decent plan.

-Take worthwhile profits
-Look for support between 1550 and 1560 to signal a continuation
-Short a break of 1550 with a stop at 1555

Stay safe

WR: How safe is this market?

By Jani Ziedins | Weekly Analysis

Weekly Review

A modest up week in the markets as we continue flirting with all-time highs.

MARKET BEHAVIOR

Stocks added a modest 0.6% this week and closed just above 1560.  The market is 45-points above the 10wma and 127-points over the 40wma.  Weekly volume was average as the range narrowed to 16-points.  Everyone is watching the headline levels 1565 and 1576, the all-time closing-high and all-time intraday-high.

MARKET SENTIMENT

Tight trade following the previous week’s large gains is either consolidation pointing toward higher prices, or the market running out of steam after an extended four-month run.

No matter what is going on in the market, there are always two valid points of view; half the money thinks prices represent a bargain and half thinks they are overpriced.  The market price is the exact balance point between these two views.  If expectations change, traders buy or sell until the price moves enough to reestablish the perfect 50/50 balance.

Here we have half the market expecting the rally to continue and half thinking we are running out of buyers.  Both sides have smart, intelligent  and thoughtful proponents, the challenge for us is figuring out which side is more likely to be right.

Further complicating the analysis is both sides could be right.  We could rally a bit more before finally running out of buyers.  This is why trading is one of the hardest ways to consistently make money.  Not only does our analysis have to be right, but we also must get the timing right.  In most industries the harder you work, the more successful you’ll be, but not in the markets.  It doesn’t care how hard we work or how smart we are.  The only thing that matters is if we buy lower than we sell.  In fact it’s been shown a lucky monkey with darts outperforms many of the smartest minds on Wall Street.  If that isn’t humbling, I don’t know what it.

Anyway, I’m getting sidetracked.  The market is either peaking here, or continuing.  If we use history as a guide, uninterrupted six- or eight-month rallies are unusual and betting on a continuation is a lower-probability trade.  Further, the rate of gains tends to slow the further along it is in the rally.  Not only are the odds of a continuation diminishing, so is the potential reward.  If we were to design our ideal trade, would we seek out low-probability, low-reward opportunities?  Hopefully not.  Without a doubt this market can continue higher, but that doesn’t make it a wise trade.

TRADING OPPORTUNITIES

Expected Outcome:
We need to be increasingly wary of this market.  It could easily take out record highs at 1565 and 1576, but what happens after that?  The older this rally becomes, the more comfortable people are with it.  At the start of the year everyone was terrified of Fiscal Cliffs, Euro Contagion,  Sequester, Debt Ceilings, and all that other stuff.  Now the market doesn’t care about negative GDP and Sequester mandated spending cuts.

Given how far we’ve come, we should be looking for ways to get out of this market, not jump in.  Use this strength to lock-in profits or use a trailing stop near 1550 to protect recent gains.

Alternate Outcome:
The global economy is clearly on the rebound and  all the prognostications of doom and gloom failed to materialize.  In fact, I count myself as staunch bull and predict the next 10-years will produce phenomenal returns.    But I still expect intermediate and near-term volatility throughout the secular bull market.  Even though I am optimistic about the future, I expect a pullback is around the corner because the market goes two-steps forward, one-step back.

INDIVIDUAL STOCKS

AAPL is up $11 for the week and this 2.8% gain has many bulls excited this is finally the widely expected rebound.  I get a lot of negative feedback over my critical analysis of AAPL, but rather than persuade me to the bull camp, the sheer amount of cheerleading further convinces me there is still too much optimism in the stock.  Anyone who believes in AAPL already owns all the stock they can handle and there is no one left to buy.  We will see some tradable opportunities as the stock rocks back and forth within a trading range, but strength should be sold, not bought.

Stay safe

PM: Embrace or shun this market?

By Jani Ziedins | End of Day Analysis

PM Update

Markets closed modestly lower, is this a healthy pause or the start of the end?  AAPL took off today, but does this move have legs?

MARKET BEHAVIOR

The market gave back some of Thursday’s breakout and failed to set a new all-time closing high on Friday.  Instead of just 2-points away, we are now 4-points from the record.  Volume was off the chart, largely because of futures and option expiration (quadruple witching).

MARKET SENTIMENT

Friday’s gigantic volume showed a fundamental shift in many traders’ risk profiles as both speculative and hedging options expired and future contracts were settled.  Many traders who were previously indifferent to downside volatility because they had put protection are now flying without a safety net.  This fact alone will add volatility to the market because these traders are now more sensitive to weakness.

Maybe it is a coincidence, but the last time we saw this level of turnover was Sept 14th, the market’s exact top-tic before the Fall selloff. Taken by itself, this is a trivial piece of information, but combining it with other factors sets off all kinds of warning flags.  This this rally is 4-months old.  We are approaching the end of the quarter. We have the left shoulder and head of a H&S pattern.  People are afraid to short this market as seen in the lack of short-squeezes on blowout employment and new highs.  All the experts are predicting another 25 to 50-points in this rally before pulling back.  Volume is tapering off because holders are holding for larger gains (greed) and buying is drying up (running out of buyers).  The market shrugs off bad news (sequester and negative GDP).  And half a dozen other reasons I can’t remember right now.

As comfortable as people feel, this is the riskiest the market has been since the November lows.  The paradox of the market is people are most afraid during the safest period following a dip and aggressive in the riskiest period following a large run-up.   I have no idea what the market will do next week, but I fear this market more than I have in many months.  My paranoia might be premature, but I’m okay with that.

TRADING OPPORTUNITIES

Expected Outcome:
It is hard to be constructive on this market.  Today was the second close above 1560 and another couple closes above this level on Monday and Tuesday means we are likely to make a run at all time highs above 1575.  But as traders we have to ask ourselves if 15-points of upside is worth 100-points of risk.  As far as we’ve come, there are two people in the market right now.  The greedy holding out for more and the late buying just before the top.  Is that the company we want to keep?  Or should we be looking for an exit?

As individual investors we only have one advantage in this game.  Big money has the resources, experience, and inside contacts we cannot compete with.  The one thing these guys cannot touch is the nimbleness of our size.  We are  in and out of trades in seconds where it takes big money weeks to build and exit positions.  The best use of our size advantage is pulling out when the clouds are building and the odds are against us.  If we sit through market turmoil, we give up the only advantage we have in this game.

Alternate Outcome:
The dip to the 50dma last month flushed out many weak holders, clearing the way a continuation higher.  There  easily could be another 100-points of upside left in this rally.  No one knows what the market will do and all we can do is trade probabilities.  Given all the clues we have, is the market more likely to top in the near future or continue higher?  Obviously I think the high probability outcome is topping, but because of our nimbleness we are not committed to one trade.  We can easily change our minds when new information invalidates our previous thesis.  The safest trade here is to lock in profits, but for those that want to see if there is more left in this rally, move your trailing stop-up to 1545/1550.

INDIVIDUAL STOCKS

AAPL had a phenomenal day and regained levels we haven’t seen in since February.  But one day doesn’t make a trend and we need to see AAPL continue proving itself before it becomes a worthy buy candidate.  The first minor technical level to reclaim is $455, a minor peak last month on the way lower.  This would be a modest victory as the stock notches its first higher-high since the selloff began, but the real level to watch is $485.

Without a fundamental catalyst reigniting AAPL’s growth, it is unlikely the stock will trade above $485.  Dividend and buyback are nice, but they don’t change the growth story, only blowout earnings or a revolutionary new product will do that.  Can AAPL reinvent its product line again, or is it just another Sony, AOL, PALM, NOK, or BBRY? (all the most innovative companies of their day)

Stay safe

AM: Where are the buyers

By Jani Ziedins | Intraday Analysis

AM Update

Stocks are trading flat, just under record highs and AAPL is taking flight.

MARKET BEHAVIOR

Stocks sold off modestly in early trade, but found a bottom and recovered to break-even by late-morning.

MARKET SENTIMENT

At the open the market exhibited restraint from buyers and profit-taking by holders, but this was a brief episode as it quickly found a floor and dip-buyers prevented early weakness from cascading into something more.

Everyone is still waiting for higher prices and a climax surge to finish this rally off.  Until then they are buying dips, anticipating new-highs are a foregone conclusion.  Bears are becoming an endangered species and even they are afraid to short this market.  When everyone thinks the market will go one direction, it often heads the other.

If traders are expecting higher prices, they are already in the market waiting for those gains.  But if everyone is already in, who is left to buy?  The amazingly low volume earlier week shows a lack of both buying and selling;  holders are holding for higher prices and buyers are running low.  At least that is one possible, and bearish, interpretation of recent events.  For the bulls, they need to explain where new money is going to come from.  Some will claim the great rotation out of bonds, and while I agree, this is a multi-year process and not enough to prop up this market over coming weeks.     Money cleaving bonds will sustain a 10-year secular bull market, but it will not prevent intermediate corrections along the way.

TRADING OPPORTUNITIES

Expected Outcome:
The rally remains intact until proven otherwise.  That doesn’t mean we have to buy or own it at these levels, but it does mean we shouldn’t short this market simply because its gone too high and needs to pullback.  Wait for real signs of exhaustion or breaking down before betting on the reversal

Alternate Outcome:
There could easily be another 50-points left in this rally, but just because something can happen doesn’t mean it is likely to happen. If this rally is to continue, it needs to do it sustainably.  Today’s flat trade is a good start, but we still need to answer the question of where are the incremental buyers going to come from.

INDIVIDUAL STOCKS

AAPL is on fire today, likely because Samsung’s Galaxy S4 is largely similar to the S3 and didn’t leave the iPhone5 in the dust.  This is more relief than a fundamental reason to buy AAPL, but sometimes no bad news is good news.  But here’s the thing, if the S4 is mostly like the S3 and the iPhone5 is mostly like the iPhone4S, what does that say about the industry?

A lot of AAPL’s sales came from customers upgrading every two-years, but what happens when the difference between model years is not even large enough to justify paying the subsidized price?  I enjoy my iPhone5, but when neighbors ask if they should get the iPhone5 for $200 or the iPhone4S for free, the free one is clearly the better choice.  There is nothing special enough about the 5 to justify paying the premium.

The risk to both Apple and Samsung is their current products are so good that the upgrade cycle is going to stretch from 2-years to 4-years. Going forward customers’ existing phones will provide more competition to sales than the rivalry between Apple and Samsung.

Stay safe

PM: Two-points shy

By Jani Ziedins | End of Day Analysis

PM Update

Another new high as the market moves beyond support at 1550.  How much longer can we keep this up?

MARKET BEHAVIOR

Stocks had another strong day, closing within 2-points of the all-time closing high.  Volume was a little below average, but made a comeback from the previous three-sessions of extremely light volume.

MARKET SENTIMENT

This is getting interesting.  The after four-days of support at 1550, the market broke through 1560.  As we discussed, markets reverse fairly quickly, so four-days at this level made a continuation more likely than a selloff.  The question is where do we go from here?  Breaking 1565 is all but a given, what’s next?

It seems like everyone is expecting the rally to continue a bit further before rolling over.  Some predict 1575, others 1600, and even a few think 1625.  The one estimate I have yet to hear is imploding tomorrow.

We could hit 1575 on Friday easily with a short-squeeze and surge of breakout buying.  1600 is more of a stretch and I doubt we could keep this string of up-days going for another 40-points, thus it will take a couple of weeks and one dip to reach 1600.  1625 is even further and would take a month and a couple of convincing false selloffs along the way.  On the other side, we could drop to 1500 by next week and 1450 the week after since markets selloff far faster than they rally.

From here the market can go up, down, or sideways.  A sharp selloff likely means the rally is dead.  The market can only bounce so many times and we used more than our fair share getting to this point.  A dip under 1550 and finishing at the day’s lows is an interesting short entry with a stop above 1555.  A surge through 1565 and past 1575 tomorrow on huge volume signals the last buyers are chasing the rally.  This is a great time to lock-in profits and consider shorting when the market starts imploding.  Lastly, the only way we reach 1600 and beyond is if the market continues consolidating and grinding higher at a sustainable rate.

TRADING OPPORTUNITIES

Expected Outcome:
Anyone who missed this rally should not rush in since this is the riskiest the market’s been since the November lows.  If you waited this long, keep waiting for the next high-probability trade, most likely a short when this rally finally rolls over.  Anyone still in the market needs an exit plan.  Take profits early or use a trailing-stop to protect hard-earned gains.  From here 1545 is a decent a trailing-stop.

Given the above analysis, a decent trading plan is:
-Sell a strong move higher and look to short the subsequent breakdown
-Short a dip under 1550 with a stop above 1555
-Set a trailing-stop at 1545 and move it up as the market grinds higher
-If the above is too much, lock-in profits and wait for the next trade, likely shorting the breakdown

 

Alternate Outcome:
Many traders expect this market will rally another 25 to 50-points before rolling over.  If we want to be contrarian, we are left with two options, an imminent breakdown or marching ahead without a selloff.  Both are viable outcomes.  If everyone is looking for a top on a surge higher, it won’t happen because no one will chase it.  This could explain the modest breakouts seen the last couple weeks.  If no one chases, the market will run out of buyers without the obvious surge higher.

At the other extreme if these are too many reluctant buyers willing to buy every dip in an effort to catch this market, they will  keep pushing us higher far longer than anyone expects.  Using the above plan will help us trade anything the market throws at us.   There are no guarantees of in the market, but a sound plan moves the odds in our favor.

INDIVIDUAL STOCKS

AAPL continues trading between $425 and $435.  Churning at these levels for an extended period of time is one way to clear dead wood, potentially taking the place of another leg lower.  If we hold these levels and start rallying in the second quarter, AAPL might actually be buyable, especially if it does this in the face of a declining broad market.  Those are some big ifs, but it is possible.  Don’t rush out and buy the AAPL here because lower is still the high-probability trade, but failing to selloff would give this alternate outcome credibility.  But even if AAPL does rally, this is a trade and expect resistance at $485, especially if the rebound moves fast.

Stay safe

AM: All-time highs within reach

By Jani Ziedins | Intraday Analysis

AM Update

Markets keep inching toward all-time highs and AAPL remains range bound.

MARKET BEHAVIOR

Stocks added to yesterday’s gains and are making new highs again after a brief consolidation.  The market is within a few points of an all-time closing high and just a bit further from all-time highs.

MARKET SENTIMENT

This is a challenging time to trade the markets.  The obvious up-trend and media constantly promoting new highs is sucking in formerly hesitant investors and convincing existing holders to keep holding.  How far this goes is anyone’s guess, but we all know it will end at some point because it always does.  Even the best traders in history cannot pick-tops with any consistency, so why do so many average traders try?  I suppose it comes down to the type of people attracted to the markets.  We are all here because we feel we have an edge.  We think we can buy things that are undervalued and sell things that are overvalued.  Some people look at this market and finally see a safe place to buy stocks; others see it as grossly over-bought and keep shorting the market.  Who’s right?

What if the best trade is no trade?  The market is in no-man’s land.  It’s gone too far to be a safe buy, but the upward momentum makes it poor short.  We’re traders and that’s what we do.  Call it a gamblers fix or whatever, but the hardest thing for many people is to just sit there without any positions.

TRADING OPPORTUNITIES

Expected Outcome:
Momentum continues. We are within 5-points of an all-time closing high.  Can the market really resist the temptation of making history?  This rally might be in the final innings, but support at 1550 shows there is still gas in the tank.  We could easily tag 1565 and that marks the top of the rally, or it sets off a short-squeeze and pushes us through 1575, at this point it is anyone’s guess.  No doubt there are stop-losses above 1565, but each short-squeeze is getting weaker and weaker.

Alternate Outcome:
I remain suspicious of the current rally, but the market is good at faking us out.  It wouldn’t be unusual to see the market pause after making all-time highs.  A pullback that finds support at 1550 shows both buyers and sellers are still behind this rally we should expect a continuation.  At this point moving a trailing stop up to 1545 gives the market room to move and lets a trader stay in the rally.

INDIVIDUAL STOCKS

AAPL is up modestly ahead of Samsung’s Galaxy announcement.  One of the more interesting things to note is how much press Samsung is attracting with this launch.  It isn’t quite Steve Jobs like, but it sure is the most anticipated and hyped Android phone release.  No matter what the Apple management claims, the market sees the Galaxy as a viable alternative to the iPhone.  Whither this is true or not doesn’t matter because stocks trade on perception, not reality.

AMZN slipped on an analyst downgrade.  Analysts ratings are not part of the fundamental story and moves because of upgrades/downgrades rarely stick.  If analysts were good at trading, they would be traders, not analysts.

Stay safe

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