All Posts by Jani Ziedins

S&P500 daily at 1:12 EST

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 daily at 1:13 EST

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

Mar 18

PM: Where’s the volume?

S&P500 daily at end of day

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 daily at end of day

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

Mar 18

AM: Fear Cyprus?

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

Mar 17

LA: Time to cash in?

S&P500 weekly at end of week

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

Mar 16

WR: How safe is this market?

S&P500 weekly at end of week

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.

AAPL weekly at end of week

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

Mar 15

PM: Embrace or shun this market?

S&P500 daily at end of day

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 daily at end of day

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

Mar 15

AM: Where are the buyers

S&P500 daily at 1:56 EDT

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 daily at 1:57 EDT

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

Mar 14

PM: Two-points shy

S&P500 daily at end of day

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

Mar 14

AM: All-time highs within reach

S&P500 daily at 12:52 EDT

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

AMZN daily at 12:53 EDT

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

Mar 13

PM: More left in the tank?

S&P500 daily at end of day

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

LNKD daily at end of day

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

Mar 13

AM: Buy, sell, or hold

S&P500 daily at 1:30 EDT

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.

NFLX daily at 1:30 EDT

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

Mar 12

PM: The streak ends

S&P500 daily at end of day

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.

AAPL daily at end of day

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

Mar 12

AM: A rest day

S&P500 daily at 1:23 EDT

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.

AAPL daily at 1:24 EST

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

Mar 11

PM: Good times keep rolling

S&P500 daily at 1:26 EDT

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 daily at 1:26 EDT

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

Mar 11

AM: Is the market safe?

S&P500 daily at 1:26 EDT

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.

AAPL daily at 1:26 EDT

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

Mar 10

LA: Getting close

S&P500 weekly at end of week

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

AAPL weekly at end of week

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

Mar 09

WR: Big weekly gain

S&P500 weekly at end of week

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

Mar 08

PM: What just happened?

S&P500 daily at end of day

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.

AMZN daily at end of day

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

Mar 08

AM: Indifference to better than expected employment