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Market bounce

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

MARKET BEHAVIOR
Stocks reclaimed 1,780 in early trade and held this level through the close.  Volume was higher than Friday, but still below average.  The market is inside of the 1,780 to 1,810 trading range still holding above the 50dma.

MARKET SENTIMENT
The talking heads are going round and round over whether the Fed will announce a reduction in QE on Wednesday.  Some say yes, most say no, but the consensus is the Fed will come out with strong language preparing the market for a slow withdrawal of fiscal stimulus in coming months.

Today’s rebound started strong, but failed to add to early gains and settled 5-point off the early highs.  Many traders are simply waiting for the Fed’s policy statement before adjusting their positions.  No doubt if there is a post-Fed pop, today’s strength brought some of that buying forward and makes an explosive move higher less likely.

TRADING OPPORTUNITIES
Expected Outcome:
The market remains in no man’s land, stuck between,780 to 1,810.  At this point it is a coin-flip if we get Taper.  The consensus seems to expect no Taper, so it is likely priced in.  We could get a short-lived bounce as news driven traders chase the move, but expect the market to quickly return the previous state.  Over the last couple weeks, the market has a couple lower-lows and lower-highs following the Thanksgiving all-time high.  Since then traders have been reluctant to buy near the highs and the market drifted lower on light demand.  (heavy selling is accompanied by above average volume)  Unless the market is shocked by good news out of the Fed, expect the light-volume drift lower to continue after the Fed induced volatility passes.

Alternate Outcome:
The market made it most of the way to the 50dma and often we don’t need more than that before refreshing the rally.  Without a scary headline, holders don’t have a reason to sell and are happy to own stock at these levels.  As long as they refuse to sell into weakness, supply will remain tight and it will be easy for the market to bounce on modest demand.

Trading Plan:
So close to the Fed statement, it is a bit late to put on a trade.  It is a binary trade and little more than a coin-flip, so the conservative approach is to trade the resulting move.  The most likely outcome seems to be an initial pop as the Fed kicks the can down the road, followed by weakness as most already expected this move and bought in anticipation.  Failing to hold 1,780 is sortable and surging above 1,800 is buyable.

Plan your trade; trade your plan

Bulls attempt a rebound

By Jani Ziedins | Intraday Analysis

S&P500 daily at 2:37 EDT

MARKET BEHAVIOR
Stocks ran up on the heels of the European market’s strength.  We reclaimed prior support at 1,780 and traded as high as 1,790, but the market slipped midday as buying paused.

MARKET SENTIMENT
This was the bounce bulls were waiting for.  The Fed’s meeting starts tomorrow and some of this buying is in anticipation of the “No Taper” surge to new highs.  But if excited bulls are buying the rumor, how many will be left to buy the news?

While everyone is debating “to Taper or not to Taper”, we should really be asking if it matters.  Given the trillions of dollars in bonds the Fed already owns, will dialing it back by $10 billion really make much of a difference to either the Fed’s balance sheet or the broader economy?  Yet it is all anyone is talking about.  The bulk of the debate revolves around taper now or early next year.  Again, this is a relatively small numbers and it won’t make much difference either way, but markets trade emotion, not common sense.  While the economic nuances of Taper policy don’t matter that much, the crowd’s reaction is what we are trying to anticipate.

Whether they Taper this week or hold off a month or two, there is a lot of pressure on the Fed to dial back its monetary intervention, both externally and internally.  Even if the Fed delays Taper, expect the language to firm up as the Fed prepares the market for the inevitable withdrawal of QE.  Bulls might get the “No Taper” they are hoping for, but if the language is hawkish, that could temper enthusiasm.

TRADING OPPORTUNITIES
Expected Outcome:
Markets remain more bullish than they’ve been in years.  While this condition can persist for an extended period of time, it is riskier to own stocks here than at any other point in the last two years.  Since no one knows for sure what the future holds, the best we can do is play the odds and anyone buying this rally is late to the party.  The best buying opportunities arise when everyone is nervous and fearful.  That is clearly not the case here as the crowd widely expects the good times to continue.

While Taper/No-Taper is a coin-flip at this point, we need to evaluate the potential moves in either direction before deciding how to trade.  The market is only 1.5% off all-time highs and 7% above the 200dma.  Given the strong run and the already bullish sentiment, it is hard to imagine a huge upside surprise given how much optimism is already priced in.  On the other hand, markets go up and markets go down.  It’s a year since we last tested the 200dma and it wouldn’t take much of a headline to trip up the market given current expectations.

Alternate Outcome:
The sideways churn between 1,780 and 1,810 saw a lot of owners move to cash.  While not a dramatic move lower, holding these levels for a few weeks allows the market to cool off, making another leg higher more sustainable.

Trading Plan:
The market is in the middle of the recent trading range ahead of the Fed meeting and there is not a lot to do here other than wait for the market to show its hand.  Dipping under the 50dma in coming days is clearly bearish and launching through 1,800 is bullish.  Until then we are all spectators.  I have a bearish bias given the bullish shift in sentiment, but this could go either way.

PLan your trade; trade your plan

Still no dip buying

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

End of Day Analysis

MARKET BEHAVIOR
Stocks slipped for a third straight day, undercutting recent support at 1,780.  The next technical level is 1,760 and the 50dma.

MARKET SENTIMENT
Volume was surprisingly light for a second day as a wave of fear and panic selling failed to hit the market.  While this orderly selling can be bullish because it shows most holders are confident and unwilling to sell modest weakness, it also means there is a huge amount of potential selling still hanging over the market if fear and panic take hold.  Since trading volume is near average, it shows sellers are not showing up in droves and this weakness is primarily caused by a lack of demand as dip buyers remain MIA.  Is this because they are waiting for more attractive prices, or more worrisome, we are running out of new buyers willing to prop up the market near all-time highs.

TRADING OPPORTUNITIES
Expected Outcome:
At this point the near-term trend is down since we were unable to hold support at 1,800 Wednesday and 1,780 Thursday.  Low-volume selling indicates we are nowhere near capitulation and there is plenty of downside potential if the herd gets spooked and rushes for the exits. The next level to watch is 1,760 and the 50dma.  Where we go from there largely depends on how emotional traders become.  If they remain calm and collected, expect more selling.  This market is stalling on over bullishness and we need to reset sentiment before the rally can resume.

Alternate Outcome:
This dip will bounce at some point because they always do, the only debate is how low we go first.  We’ve seen a lot of distribution over the last three weeks with 12 of the last 18 days finishing in the red.  Anyone selling at the top has plenty of cash to buy the dip when it reaches an attractive level.  Recently we have been bouncing sooner and sooner and could very well could be on the verge of yet another rebound to new highs.  The key is reclaiming support at 1,780 and 1,800.  With the market so perfectly setup to selloff, if bears cannot get the job done, they show they are powerless to hold this rally back.

Trading Plan:
The new lines in the sand are 1,780 above and 1,760 below.  Reclaiming 1,780 shows buyers are finally stepping up to defend this rally.  Falling under 1,760 could finally trigger that high-volume wave of capitulation selling as confident owners turn into fearful sellers.  So far nothing indicates this move is more than a routine pullback to support, but given how much potential selling is still out there, things could get ugly in a hurry if fear takes over.

Plan your trade; trade your plan

Three in a row

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:15 EDT

Intraday Update

MARKET BEHAVIOR
Stocks slipped for a second day, undercutting support at 1,780.  If today’s losses hold, that makes eight out of the last ten sessions ending the red, a dramatic reversal from all the buying we’ve seen in recent months.  The next material level of support is 1,760 and the 50dma.

MARKET SENTIMENT
While we’ve held near all-time highs in recent weeks, there was a clear undercurrent of distribution taking place under our noses.  Eight of the last ten and twelve out of the last eighteen sessions finished lower.  The losses have been so minor that bulls could easily ignore the distribution, but violating support this morning makes this phenomena harder to hide from.

Dip buyers remain MIA.  Wednesday they failed to defend 1,800 and today they allowed us to slip through 1,780.  The saving grace is today’s violation of 1,780 didn’t trigger a free fall selloff as many owners chose to wait for the “inevitable” bounce rather than sell a dip under some “arbitrary” technical level.  And this isn’t surprising.  Every other bout of weakness this year ended in a powerful rebound to new highs and regretful sellers learned to be more patient next time.  While this strategy worked every other time this year, we inevitably come to a dip that doesn’t bounce.  It is too early to say this is the end, but the lack of urgent selling likely means we haven’t hit bottom yet.

TRADING OPPORTUNITIES
Expected Outcome:
The crowd was wrong about “Sell in May” and they avoided September and October because that’s when markets crash.  But now they are waiting for the Santa Clause rally.  Will conventional wisdom end the year oh and three?  If the success in the market was as simple as following a few catchy phrases, preschoolers could beat the market.

Dip buyers need to come in and prop up the market, until then assume buyers are scarce and selling will continue.

Alternate Outcome:
The best time to buy is when everyone else is convinced we are headed lower.  Violating support this morning flushed out anyone with stop-losses.  Once that selling runs its course, supply will dry up and we will bounce yet again.

Trading Plan:
Stick with what is working.  The market is selling off without urgency and these things typically end on an emotional climax, something we have not reached yet.  Bullishness it near historic highs and we need a dramatic move to reset sentiment to more sustainable levels.  While we will eventually reach a buyable bottom, there is no reason to buy prematurely.  Wait for this move to run its course and buy the resulting strength.

Plan your trade; trade your plan

Time to get out?

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

End of Day Analysis

MARKET BEHAVIOR
It was a bloody day in the markets as we gave back all of Friday’s employment pop.  The market is a couple of points above support at 1,780 and a dip under this level will trigger a second wave of stop-loss selling.  The market remains comfortably above the 50dma, but we will likely test this level if we cannot hold 1,780.

MARKET SENTIMENT
The question on everyone’s’ mind this afternoon was “buy the dip or sell before it is too late?”  This selloff roiled the calm ride we’ve had to this point.  This is far from a crash but it did serve as a wake up call for many traders.

Volume was only 7% above average, showing an orderly selloff without much panic.  This tells us the decline was more a function of buyers not showing up than a mass rush for the exits.  Like everything in the markets, there are two ways to read this.  The bullish view is confident owners don’t sell weakness and the market will quickly bounce on the lack of shares available for sale.  The bear’s counter argument is we haven’t seen the real wave of emotional selling hit the market yet.

For the first eleven months of the year I believed in the bulls argument that confident owners keep supply tight and prop up prices.  But given the dramatic shift in sentiment and churn in ownership from value oriented dip buyers to momentum chasers, I no longer have confidence in the resolve of owners to keep holding in the face of weakness.  These are buyers who rushed to the market once the coast was free of doom and gloom headlines.  These new, fair-weather owners are likely to be scared by their own shadow their selling will pressure markets.

TRADING OPPORTUNITIES
Expected Outcome:
It doesn’t feel like the dip is done.  The low volume selling shows we haven’t hit the emotional capitulation that often signals a bottom.  We will likely break support at 1,780 on Thursday and that stop-loss selling will trigger another leg lower.  The next stop from there will be the 50dma.  After that it largely depends on traders emotions.  Will confident owners keep holding and end the selloff?  Or will headlines screaming Taper cause many to throw out all their carefully laid plans and allow the herd selling destroys their resolve?

Alternate Outcome:
Every other dip this year felt like the real thing, why is this one any different?  We dip a couple percent, everyone gets all worked up, selling exhausts itself, and we make new highs a week later.  While this pattern cannot continue forever, its been the best trade of the year.

Trading Plan:
While we might see a modest bounce in the morning as dip-buyers try to defend 1,780, expect a fresh wave of selling to hit the market if this support level doesn’t hold.  How each trader responds to this move largely depends on their timeframe.  Nimble swing traders can short this violation of support with a stop above 1,780.  Intermediate-term traders looking to buy the dip should wait for lower prices.  Longer-viewed traders need to get ready to buy their favorite stocks when emotional owners are selling them at steep discounts.

While I expect further selling, the one thing that will turn me into a buyer is if we slip under 1,780 but bounce back decisively.  Failing to trigger another leg lower after breaking support shows the selling exhausted itself and this is yet another dip buying opportunity.

Plan your trade; trade your plan

Where are the dip buyers?

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:22 EDT

Intraday Update

MARKET BEHAVIOR
This morning’s selloff wiped out all of last Friday’s employment bounce.  We slipped under support at 1,800 in early trade and its been all downhill since then.  The next meaningful support level is 1,780.  Failing to hold that likely means a trip back to 1,760 and the 50dma.

MARKET SENTIMENT
Dip-buyers are MIA.  Either they are sitting on their hands waiting for even better prices, or we ran out of them and this slide will continue until we reach levels far more thrifty value investors cannot resist.

The news is fairly benign and we don’t have a major headline event driving this selling.  We simply ran out of new buyers willing to chase stocks at all time highs.  This happens from time to time and why buying stocks when everyone is fearful is typically a better strategy than waiting until the coast is clear.  Regardless of how we feel, stocks have never been riskier as we marched to new all-time highs.  That is the great paradox of the market, the higher prices go, the safe we feel, the more risk we are exposed to.  There are plenty of great times to buy breakouts and hold stocks making new highs, but that is when we still have fear and cynicism to feed off of.  Since the budget deal in October, there has been little to worry about and most investors forgot their reluctance and finally embraced this market with open arms.  But as soon as everyone finishes packing their accounts full of stocks, we run out of new buyers to keep pushing prices higher.

While it is premature to call this a top, buying definitely stalled.  Between stronger than expected employment numbers last Friday and a new longer-term budget solutions in DC on the table, we should be higher, not lower.  Some will attribute this to renewed expectations of Taper, but never forget prices move on supply and demand, not fundamentals or technicals.  We simply ran out of new buyers willing to throw their money at the market and are selling off as a result.

The challenge for bulls is this third pullback under 1790 is making many current owners and prospective buyers nervous.  With so many bullish on stocks, that leaves us with a huge pool of potential sellers.  Few buyers and lots of potential sellers is rarely a good combination for stock prices.

TRADING OPPORTUNITIES
Expected Outcome:
Failing to capitalize on recent good news shows buying is stalling and we need to tread lightly.  The key levels to watch are 1,800 and 1,780.  Bouncing and retaking 1,800 shows demand is alive and well.  Slip under 1,780 and it will trigger a wave of stop-loss selling, pushing us down to 1,760 and the 50dma.  From there it will be a matter of seeing if that is low enough to trigger a counterbalancing surge of value oriented dip-buying.

Alternate Outcome:
Over the last 12-months owners have been conditioned to hold through any and all weakness because it always ends in a bounce.  This makes it far more difficult for weakness to shake supply free.  That lack of selling makes it easier for modest dip-buying to prop up the market and has been the foundations this 25% year was built on.  Markets go down when supply swamps demand and as long as owners keep their cool, supply will remain constrained.

Trading Plan:
Shorts can take a shot at this weakness with a stop above 1,800.  Buyers are best served waiting until the market regains 1,800 because it is better to be a little late than a lot early.  Owners need to decide how much pain they can tolerate.  Shorter duration traders should have already locked in gains.  Long-term traders should ignoring these fluctuations and use any weakness as a buying opportunity.

Plan your trade; trade your plan

Testing 1,800 again

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

MARKET BEHAVIOR
Stocks slipped in modest trade as buyers took a break.  We remain near the upper end of the recent 1,780 to 1,810 trading range and barring any major headlines, we will likely bounce around these levels as the market consolidates recent gains.

MARKET SENTIMENT
It is not unusual for the market to cool off after Friday’s strong rebound and the previous 150-point run from the October lows.  While it is easy to grow enthusiastic following such strong moves, rationally we acknowledge that every day cannot be an up-day.  But is this just cooling off or hinting at far more insidious stalling?

Last Friday’s better than expected employment report erased a five-day losing streak, but since then buying has been fairly tepid.  Yesterday the market failed to punch through 1,811 three different times.  Market makers and HFTs love pushing us to new highs because that often triggers a short squeeze and stimulates trading that puts money in their pockets.  But if they didn’t have the strength to push us those last few points, we have to wonder if this latest rebound is already running out of gas.

Sentiment swung dramatically from the depths of the Budget Crisis and most measures of sentiment are near historical highs.  While these conditions can persist for long stretches of time, it does suggest upside is more limited if the crowd already embraced this market and is fully invested.  We need new buyers to keep pushing prices higher.

TRADING OPPORTUNITIES
Expected Outcome:
Previously 1,800 acted as support and it will be insightful to watch how the market responds now that we are just a couple of points above this support.  Do we bounce off it as the good times roll, or does last week’s slow-motion slide continue as we dip back into the 1,700s?  Supposedly our politicians are coming together around a budget deal, but if that good news fails to excite the market, that likely means most of the good news is already priced in and more selling is likely.

Don’t buy any of the chatter about bubbles, crashes, and the such.  Markets go up and markets go down.  It is as simple as that.  Don’t read too much into these periodic step back.

Alternate Outcome:
Bouncing off of 1,800 and setting new highs will prove there is still plenty of demand for this market at these prices and there is little else to do but hang on and enjoy the ride.

Trading Plan:
If the market is in a trading range, expect near-term weakness.  1,780 is an important level because we bounced off it and a large pile of stop-losses are littered under this level.  Slip under and it will likely set off a wave of selling and push us down to the 50dma.  If we bounce off 1,800 and make new highs, this rally is not ready to take a break.

Plan your trade; trade your plan

Don’t Worry, Be Happy

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

End of Day Analysis

MARKET BEHAVIOR
Stocks continued Friday’s strength and climbed three-points to finish at 1,808, setting a new closing high.  So far the market remains at the upper end of the recent trading range between 1,780 to 1,810 as it consolidates gains.  Are we about to hit our head on the upper end of this range, or breakout?  The market will let us know as early as Tuesday.

MARKET SENTIMENT
Friday’s stronger than expected employment report continues the “no worries” theme.  Traders no longer fret over impending doom and gloom the way they did through the first 10-months of the year.  We gradually eliminated all the major risk factors, including Fiscal Cliff, Sequester, Default, European Contagion, Shutdown, and Taper.  The market rallied strongly as these terrifying headlines turned into non-issues.  More evidence that buying when other people are fearful is a very profitable strategy.

But what happens to a rally that thrives on fear, runs out of fear?  So far momentum is continuing our ascent higher, but we must always ask ourselves who is the next  buyer?  Earlier in the year we had a plethora of money sitting on the sidelines in anticipation of the widely expected correction that never came.  As we conquered every risk thrown our way, reluctant money’s fear of a correction was replaced with a fear of being left behind.

It took a while, but the crowd finally embraced this market.  This is in stark contrast to this time last year when everyone was convinced the Fiscal Cliff was going to annihilate our fragile economy.  With hindsight as our guide, it is painfully obvious what a fantastic buying opportunity that was, but what about now?  Is it too easy to buy here?  Should that alone make us fearful?

TRADING OPPORTUNITIES
Expected Outcome:
When in doubt, stick with the trend.  That has been the right call all year and more recently we keep bouncing back from even the most benign dips.  Last week we were down an almost trivial two-percent from the highs before the employment rebound pushed us right back to record highs.  The question is if there are enough chasers left to continue buying these highs, or if last week’s five-day slide is a material sign of flagging demand.    While the economy is chugging along, markets rarely respond to fundamentals in obvious ways.  That would be too easy and we all know the market is anything but easy.

Alternate Outcome:
If I had a dollar for every time I heard someone say this market’s gone too far.  Those guys were forced to eat their words, so what makes this time any different?  If picking tops were easy, we’d all be hanging out on the beach in some tropical destination drinking ice-cold beverages instead of huddling around space heaters trying to survive this cold spell.

Trading Plan:
With so little fear remaining in the market, the probability of an explosive move higher is greatly diminished.  That leaves two options, a sideways grind higher, or the selloff everyone’s been waiting for.  We are quickly establishing a trading range between 1780 and 1810.  Since we are at the upper end of this range, look for recent strength to stall.  Depending on how dip-buyers respond, we could bounce at 1800, or slip to 1780.  Recent weakness set a floor at 1780 and many traders will use this level as a stop-loss.  Breaking through will trigger a wave of selling and we will quickly test the 50dma.  If we bounce, it becomes another routine dip-buying opportunity.

Plan your trade; trade your plan

Employment saves the day

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

MARKET BEHAVIOR
Stocks recovered two-thirds of recent losses on Friday following a stronger than expected employment report.  We gapped higher at the open and held these gains through the close.  Reclaiming prior support at 1,800 is a big win for the rally and the market is establishing a trading range between 1,780 and 1,810.

MARKET SENTIMENT
Bulls are breathing a sigh of relief as this employment report snaps a five-day losing streak.  While the modest selloff made holders uneasy, it wasn’t deep enough to convince a large number of them to dump their shares.  Much of the recent selling was likely bears shorting the weakness and Friday’s strength forced many of them to buy back those shorts for a loss.  Short-squeezes are strong, yet temporary and the bigger question following Friday’s rebound is if this strength will attract a sustainable wave of new buyers to the market.

With bullish sentiment at levels we haven’t seen in years, it is hard to get excited about owning this market.  The challenge of trading sentiment is it is just as hard to pick a top in sentiment as it is to pick a top in the market.  While sentiment doesn’t give us a timing signal, it does provide insight into how large resulting moves might be.

Stocks only move when people change their minds.  This is when they adjust their portfolio to reflect their new outlook and the resulting buying and selling moves prices.  The problem with widespread bullish sentiment is there are fewer people remaining to convert to buyers and that limits the potential upside.  On the other hand, a huge crowd of bulls creates an ample supply of prospective sellers.  While we can continue higher as we attract the last of the holdouts, there is far more risk of a large downside move simply because of how crowded the bull side has become in recent weeks.

TRADING OPPORTUNITIES
Expected Outcome:
Trends are more likely to continue than reverse, but the larger potential move is to the downside.  How each person trades this is up to them.  Someone swinging for the fences will short the market since that is where the biggest pile of money is.  Someone happy with small gains will continue squeezing nickels and dimes out of the rally.

Alternate Outcome:
Treasuries keep falling in price, chasing many out of that market and they need to find a place to park their money.  Given what a great year it’s been for equities, many will be tempted to chase this strength.  Their buying can continue pushing us longer and higher than anyone imagines.

Trading Plan:
The market is consolidating in the 1780 to 1810 range.  We can buy the weakness and sell the strength until the next directional trade breaks out or breaks down.

Plan your trade; trade your plan

Five in a Row

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

End of Day Analysis

MARKET BEHAVIOR
Stocks slipped for a fifth consecutive day.  While that sounds worrisome, the declines are measured in tenths of a percent and after all that selling we are only 1.5% from all-time highs.

MARKET SENTIMENT
While the seemingly chronic weakness is weighing on the market’s spirit, it has not been enough to convince most traders to change their outlook or positions.  They keep holding in anticipation of the expected bounce and the selling has been so mild it isn’t applying pressure to holders.  Markets refresh after strong runs by flushing out the excess.  So far these five days have not provided us with a meaningful flush that forces weak hands from the market.  While we can bounce to new highs at any time, failing to reset the giddy sentiment will prevent it from being a meaningful and sustained move higher.

Friday morning brings the November jobs report.  The market was blown away by October’s unexpected strength in the face of the Gov’t shutdown and this week’s ADP numbers were also stronger than expected.  Both of these prior beats lay the framework for high expectations.  The challenge for bulls is finding their Goldilocks number.  Too high and it threatens easy money.  Too low and it signals economic weakness.  But what happens if we slip perfectly between these two landmines?  Do we surge higher, or are the raised expectations already priced in and there is little upside remaining.  Potentially we face a no-win situation if we run into a sell-the-news even if employment hits the sweet spot.  Too highs and traders sell, too low and traders sell, and just right, no one buys.  While this hypothetical is a bit exaggerated, it sure seems like there are more reasons to go down than up and that skew creates a trading opportunity.

TRADING OPPORTUNITIES
Expected Outcome:
Today’s failed follow through on the heels of yesterday’s impressive intraday bounce reveals cracks in the rally.  Every other time this year a strong reversal would leaded to a sustained move higher.  This time buyers are either waiting for more attractive levels or we exhausted the supply of new money.  While it is always risky to go against the trend, today’s weak trade following yesterday’s strong rebound signals a potential change in character.

Alternate Outcome:
The market hates being predictable and buying the dip is getting way too easy.  While the market could continue higher, it wants to convince everyone it is going lower first.  That means continued weakness until most bulls give up and most bears get cocky.  Only after that reversal in sentiment will prices bounce back with a vengeance.  The market moves on its schedule and it is often more patient than the rest of us.

Trading Plan:
As long as we remain under 1800, we need to be cautious.  Owners can lock in profits and dip-buyers should sit on their hands.  Wait for the market to prove itself by reclaiming and holding 1800 before jumping back in.  While we could pop above this support level soon after the jobs report, wait to see if the gains hold before chasing.  On the other side, bears can use any weakness to add shorts while keeping a tight stop above 1,800.

AAPL daily at end of day

INDIVIDUAL STOCKS
All the good news is out for AAPL. We have new iPhones and iPads in time for Christmas and AAPL bulls got an early present with the leak that China Mobile will start selling the iPhone in coming weeks.  This was the most anticipated announcement all year, yet the stock closed up less than $3.  A good rule of thumb for retail investors, if you know something, then it is likely everyone else also knows it and it is already priced into the stock.  Today’s non move on the China Mobile headline is more indicative of a buy the rumor, sell the news trade and any owners should move up their trailing stops.

TSLA is consolidating recent gains following the German stamp of approval on the car’s batteries.  Any broad market weakness will likely hit this stock doubly hard, so it is still a no-touch until both the market and stock prove they are ready to continue higher.  For TSLA that means clearing the 50dma.

Plan your trade; trade your plan

Nickels and Dimes

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:15 EDT

MARKET BEHAVIOR
The slow grind lower continues for a fifth day as the market gave up an almost trivial three-points in early trade.

MARKET SENTIMENT
Five days of selling that only manages a 1.5% decline from all-time highs is hardly worth paying attention to, but maybe that is the plan.  The market might try to lull us to sleep before it robs us blind.

There are two kinds of market declines, the spectacular crashes that take everyone’s breath away, leaving us paralyzed with fear and indecision.  The other is a painfully boring slide that chips away nickels and dimes under our nose.  We all know the market is imploding when we wake up one morning and a huge chunk of our portfolio is missing, but when we slip a few points here and there, no one seems pay too much attention.  These are the losses we can easily rationalize away because no one is afraid of 0.1% and 0.2% declines.

But the thing is the slow-moving selloff tend to last longer and do more damage than their faster moving cousins.  Everyone remembers the Financial Meltdown that crippled global markets in the Fall of 2008, but many forget the market had already been selling off for a full year prior to the crash.  Drop five percent in a day and it is headline news.  Drop five percent over two months and no one notices.

TRADING OPPORTUNITIES
Expected Outcome:
The 1.5% dip from all-time highs doesn’t seem to be enough to attract a new wave of dip-buyers and we continue languishing under 1,800.  Sometimes holding near new highs supports recent price gains, other times it signals dwindling demand.  Most stock owners have been conditioned to continue holding weakness because every time they sold, they came to regret that decision as the market quickly rebounded to new highs.  That attitude is keeping supply tight and supporting prices as owners refuse to sell the weakness.  But we also need to worry about the other half of the equation, demand.  With as optimistic as the market’s become in recent weeks, many of the people who wanted to buy this market already have. Without a supply of fearful holdouts to convert into buyers, it is less clear who will fund the next leg higher.

Alternate Outcome:
Markets consolidate gains one of two ways, the first is pulling back, the second is trading sideways for extended periods.  While it seems likely this market will reconnect with the 50dma in coming weeks, it could do that by simply staying at these levels and letting the moving average catch up to it.

Trading Plan:
There is a little something for everyone.  A bear can short the market with a stop above 1800.  A bull can continue holding with a stop under  1,780.  For the person out of the market looking to get in, wait until we reclaim 1,800 before buying.  It is better to be a little late than a lot early given all the clear air under the market.

Plan your trade; trade your plan

A wild ride to nowhere

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

MARKET BEHAVIOR
A wild ride to nowhere.  Gap 10-points lower at the open, surge 15-points an hour later, collapse 20-points a few hours after that, only to reclaim another 15 just before the close.  If anyone is keeping track that, there was more than 60-points of up and down through the day, easily the wildest ride in quite some time.  But for all that amazing volatility, we finished down a trivial 2-points!

MARKET SENTIMENT
There was a little something for everyone in today’s trade.  For bears, tops are often volatile as the battle between bulls and bears heats up.  This is because previously dominant bulls start losing their grip on power and bears are finally able to put up a competitive fight.  Today’s back and forth certainly qualifies as a competitive fight.  For bulls, everything was clearly going the bears way when we slipped under 1,780, yet they couldn’t hold that ground as a wave of dip-buying bowled them over.

Markets often break down faster than they climb.  There are plenty of human and crowd psychology reasons for that, but what is important is bears had a golden opportunity to break this market wide open, but they just couldn’t get it done.  That clearly shows buyers are not rolling over here and they still have sufficient strength to defend these levels, at least for the time being.

While today’s rebound is impressive, it is hard to be bullish when everyone else is.  Investor Intelligence bullish readings are near 5-year highs (57.1%) and bearish levels are setting new 5-year lows (14.3%).  While these readings don’t give us definitive trading signals, they indicate an imbalance that will invariably swing back the other way at some point.  Maybe it won’t be tomorrow, next week, or next month, but it is coming and that makes it hard to get comfortable with these levels.

TRADING OPPORTUNITIES
Expected Outcome:
Markets decline for one of two reasons.  The more obvious is unexpected bad news causes investors to lower their expectations of the future and thus the price they are willing to pay for stocks.  The second is running out of new buyers because the crowd is extremely bullish and everyone who believes in the rally already owns all the stock they can hold.  While the first case leads to a terrifying and breathtaking plunge, the second scenario sneaks up on us as we slip lower without raising alarms.  Since current worries are few and far between, we can discount the imminent plunge and instead need to be watchful of the benign grind lower.  While it is clearly premature to be talking about a correction 1% from all-time highs, with so many bulls already in the market, it is hard to figure out who the next greater fool is.

Alternate Outcome:
When in doubt, stick with the trend.  So far we have seen little concrete data or technical behavior to suggest this market is running out of gas.  Even if we pullback for a few days, all that does is shake free weak owners who will soon be forced to chase this market as it continues higher without them.  Reclaiming 1,800 and setting new highs above 1,813 will go a long way to showing this rally still has legs.

Trading Plan:
The market is at a critical juncture.  Either we bounce or we don’t.  It is hard to be more clear than that.  Failing to reclaim 1,800 shows buyers are becoming scarce and a test of the 50dma is likely.  On the other side, another humiliating defeat of bears at 1,780 likely means we have new highs in the near future.  Trade each of these scenarios according to your outlook, but keep stops close incase the market doesn’t respond as expected.

INDIVIDUAL STOCKS
The WSJ is reporting AAPL finally landed China Mobile, something AAPL bulls have been eagerly waiting for.  Now that it is finally here, we get to see how much of this news is actually priced in the stock.  While we will no doubt see a strong reaction to the news, the more meaningful trade will occur after the initial excitement settles down.  Will the stock keep adding to those early gains, or is this a buy the rumor, sell the news event?  If we see a nice pop, it would be hard not to take profits off the table given how far the stock’s come in recent months.  This is not unexpected news, so it is unlikely it will cause a lot of investors to change their mind about the stock.  Those that were bullish before this news will remain bullish, and most bears are bears for reasons unrelated to China Mobile and equally unlikely to change their outlook.

Plan your trade; trade your plan

Volatility increases

By Jani Ziedins | Intraday Analysis

S&P500 daily at 2:18 EDT

MARKET BEHAVIOR
A wild ride this morning as we gapped lower, surged higher, and then plunged under the early lows by midafternoon.

MARKET SENTIMENT
Volatility is often a sign of shifting trend as many stubbornly continue trading what has been working, but their declining numbers mean they don’t hold the same sway over the market.  For the last 12-months every dip has been buyable.  While most resisted buying the dips in the first half of the year because they expected a pullback, now everyone is buying the dips because that has become the most obvious trade.  But what happens when everyone starts buying the dips?  After a while the crowd ends up fully invested and there is no one left to buy.

The last few months has seen a dramatic shift in sentiment as we went from countless headlines of doom and gloom to a complete lack of fear.  Markets move when people change their mind and as people warmed up to the market, their buying pushed us to all-time highs.  Now that we are at a point where everyone feels pretty good, there are fewer bears left to convert to bulls.  That means price gains will slow down.  Even more worrisome is this new, large pool of bulls is ripe to change their minds their selling will push us lower.

While sentiment is not an exact science, it gives us insight into probabilities for a move.  While we can easily continue making new highs, the large shift in sentiment makes us vulnerable to a pullback.  While we cannot use this as a timing signal, it gives us an idea of the actual risk/reward of owning the market.

TRADING OPPORTUNITIES
Expected Outcome:
Fear and uncertainty is only just starting to creep back into the market.  By nature the market is a fearful creature and the last six weeks has been unnatural.  Nothing brings fear back into the market like sliding stock prices.  It really doesn’t matter what reason people attach to it, they are simply trying to rationalize what is nothing more than the laws of supply and demand taking over.  While it seems likely we are destined test the 50dma in coming weeks, it won’t be a smooth ride and expect the choppy volatility to continue.

Alternate Outcome:
Every dip is buyable until it isn’t.  We are only 1.5% from all time highs and it is certainly premature to be calling a top.  Every dip purges excess from the markets and this choppiness might be all we need to refresh the market and set the stage for the next leg higher.  If the market recovers recent losses, that shows dip-buyers are alive and well.

Trading Plan:
Given the large shift in sentiment recently, it is hard to justify the risk/reward of buying such a minor dip.  Let this move play out and we will likely get the opportunity to buy at even more attractive levels in coming weeks.

Plan your trade; trade your plan

Time to cool off?

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

MARKET BEHAVIOR
Stocks opened under 1,800 and failed to reclaim this nice round support level by the close. The market is still 50-points above the 50dma following its 160-point, nearly straight-up bounce off the October lows.  This is the eighth-week the market’s been above the 50dma and is the longest stretch since we did nine-weeks back in January and February.  No matter what side of the bear/bull debate we fall on, it is perfectly reasonable to expect the market to retest support at the 50dma in coming weeks.  Sometimes that involves a pullback, other times it simply means pausing so moving average can catch up.

MARKET SENTIMENT
The last few weeks have been worry-free once our politicians quit their bickering and raised the debt ceiling, removing the risk of a catastrophic default.  Since then it’s been clear sailing with the tail winds of Yellen’s confirmation hearing and stronger than expected October employment numbers.  But the thing is the market is a worrier by nature and it cannot go long before fear over some impending disaster creeps in.  Today’s weakness is largely attributed to a bad day on the German markets and increasing concern over Taper in our part of the world.

Markets often move in waves as the pendulum of sentiment swings between fear and greed.  It’s been a good run and we should expect a move the other direction at some point.  But when the fear creeps in, embrace it, don’t be afraid of it.  Nervous sellers dumping shares at a steep discounts is the way confident traders make money.  Their fear is our profit.

TRADING OPPORTUNITIES
Expected Outcome:
Anyone holding out for higher prices in the near-term needs to see the market reclaim 1,800.  This proves dip-buyers are alive and well.  Without that, we could see the market slip back to the mid 1,700s as value oriented buyers wait patiently for more attractive prices.

Earlier this year the traditional “sell in May” was a bad idea, as was the conventional wisdom  that September and October are horrible months to own stocks.  Now we have many of those same people pointing out how strong December traditionally is.  2013 hasn’t payed much attention to conventional wisdom, so I wouldn’t count on the Santa Clause Rally either.

Alternate Outcome:
Reclaiming 1,800 and setting new highs this week shows this rally isn’t ready to take a break and wants to keep going.  While we can debate the sustainability of such a move, only price pays and we cannot argue with a rallying market.

Trading Plan:
Traders need to quickly decide on what timeframe they are using.  Longer-term investors will sit through any near-term weakness and use these opportunities to buy more of their favorite stocks.  Shorter-term investors should lock in recent profits and look to buy back in at lower levels.  The most aggressive can short the market with a stop above 1,800.  If we reclaim and hold 1,800 we need to reevaluate expectations of near-term weakness.

MSFT daily at end of day

INDIVIDUAL STOCKS
TSLA blew up in shorts faces as a German regulatory agency deemed the car safe following recent reports of battery fires. That sent the stock up $20.  But is this a fundamental catalyst that will get the momentum bandwagon going again?  That is harder to say.  I have my doubts, but if the stock reclaims the 50dma, then let the party continue.  If it hits its head on this level, we likely still have more selling in front of us.  No matter how safe the car is, the public if fascinated by this story and expect any future car fires to be front page news.  This is no different from the TM gas pedal incidents or Gulf Coast shark bite scares.  The more rare the event, the bigger the news it is, especially when someone catches video of it on their smart phone.

AAPL is off to the races again as the iPhone and iPad are flying off the shelves this holiday season.  While that was expected, more surprising is the PBS News Hour reported that MSFT‘s Surface was the best-selling tablet at Best Buy over the weekend.  While this was aided by aggressive pricing, buyers might actually be looking for more utility out of their tablets than Angry Birds and Candy Crush.  I believe the future lies in full featured tablets and MSFT/INTC are the only ones providing these capabilities.  While many accuse MSFT/INTC of falling behind the times, I actually think they are ahead of the pack on this one.

Plan your trade; Trade your plan

Waiting for the bounce

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:10 EDT

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

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

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

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

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

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

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

Plan your trade; trade your plan

Testing support at 1800

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

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

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

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

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

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

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

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

AAPL daily at end of day

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

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

Plan your trade; trade your plan

Slow holiday week

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

MARKET BEHAVIOR
Stocks gave up a modest 0.1% in a light, holiday week session.

MARKET SENTIMENT
Most of the senior traders are on vacation, leaving junior guys in charge of the trading desks.  That explains the light volume, but it also gives us insight into the kind of moves we might expect.  Most of the intelligent thought occurs on the buying side of a trade and is the domain of the most experienced managers.  On the selling side, they largely have set profit targets and stop-losses that trigger sales.  With the senior guys on vacation, we shouldn’t expect rookie traders to initiate new positions or buy dips without the oversight and approval of their bosses.  On the other hand, they do have their orders to sell when stocks hit predetermined price levels.  Limited buying authority and strict sell rules create the potential for a larger than normal selloff  since there will be fewer buyers ready to catch the dip.  That doesn’t mean this will happen, but we should expect fewer dip buyers if we stumble into some weakness.

TRADING OPPORTUNITIES
Expected Outcome:
With few traders looking to buy aggressively this week, we shouldn’t expect a strong move higher.  On the other hand, crossing stop-losses could trigger a wave of selling and we could fall further than expected without the support of dip buyers.

Alternate Outcome:
We have stop-losses on both sides of the market and any strength could trigger a short squeeze, sending us even higher.  Given the low volume of the holiday week, it doesn’t take much buying to move the markets sharply higher.

Trading Plan:
This skew between buying and selling authority over the holiday week sets up a favorable short given the potential for limited dip buying in the face of any weakness.  Or the simpler move is sitting out the low-volume week and taking a well deserved break from the markets.

FB daily at end of day

INDIVIDUAL STOCKS
FB continues to struggle following its most recent earnings call where the company hinted at weakness among young users.  On the opposite side, NFLX seems to be recovering from its earnings call driven selloff when Reed Hastings suggested the stock might be ahead of itself.  While not close to the post-earnings spike, the stock is staying well above the 50dma and challenging $350.

AAPL is consolidating recent gains and letting the 50dma catch up as owners hope for a strong holiday season.  With all new iPhones and iPads, this is the time for the company to reverse the market share losses and reclaim some of its mojo.  AAPL bulls are wishing for a China Mobile deal for Christmas, but while they’ve been waiting years for this deal, Android has become the smartphone of choice and AAPL’s China marketshare is in the single digits.  Will wealthy Chinese really dump their five-inch Android phones for the cool looks of an iPhone?  Only time will tell.

Plan your trade; trade your plan

Next greater fool

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

MARKET BEHAVIOR
Stocks recovered the bulk of the last three days of selling and finished a few points shy of 1,800.  Volume was higher than the three prior down-days, but below average as we approach next week’s holiday shortened week.

MARKET SENTIMENT
Dip buyers jumped in and reversed this week’s modest selloff.  If buyers continue supporting these levels in coming days, that invalidates the thesis we are running out of buyers.  Markets often roll over quickly and holding up here for a couple more days prevents us from seeing that quick move lower.  Often that means the next is higher.

Markets roll over for one of two reasons, bad news but also paradoxically, good news.  The first one speaks for itself and there is no reason to cover it here.  The other is running out of buyers when the bull market wins over last of the fearful and finally convinces everyone to buy.  It successfully defeats every objection these pessimists have and they rush in as the final piece of good news falls into place.  From then on, it doesn’t matter how bullish follow-on stories are, the market cannot go any higher because everyone already bought in.  (Obviously terms like “everyone” are hyperbole, but you get the idea.)

Since the current market doesn’t have fearful headlines obsess over and by rule it is impossible to predict the next unexpected catastrophe, we are left deciding how many buyers are left to keep buying the good news.  Over the near-term there are a finite number of traders ready to put their money into the market.  While there are gigantic mountains of cash stashed in bonds and money markets earning negative real rates of return, they’ve been there for the last five years and are unlikely to flood into the market tomorrow or next week.  No doubt this is a major fundamental catalyst that will fuel our secular bull, but for this near-term analysis we can ignore them.

Markets move up and markets move down, driven largely by the shifting outlook of short-term traders.  They buy when they feel good and they sell when they get nervous.  Institutional money managers and buy-and-hold investors skip these gyrations as they hold for 12-months or longer.  If we ignore the money hiding in bonds and don’t count the buy-and-hold crowd, we are left with this smaller and more active swing trading crowd.  These guys pushed us up to recent highs, but they don’t have the deep pockets to keep moving us higher.  Some claim we will see a chase for performance into year-end, but to be honest, the chase started 9-months ago and anyone still sitting on their hands this long is unlikely to make a move now.  So the question is, where are the next round of buyers coming from?  I have a hard time answering that question and is why I am reluctant to own this market in the near-term.

TRADING OPPORTUNITIES
Expected Outcome:
While the market can continue higher, there is not a big weight hanging over it and we lack that explosive catalyst to launch us higher.  On the other hand, we are over 60-points from the 50dma and 160-points from the 200dma.  Limited upside combined with lots of open air underneath us don’t setup a favorable risk/reward.  The market likely has a date with the 50dma and either we dip down to meet it, or we grind sideways until it comes to us.  Given that setup there is not a lot of reason to own risk here if we are not getting paid for it.

Alternate Outcome:
While we are not currently in a bubble, we could easily continue higher without pausing and put ourselves in one.  Only price pays and it makes no difference why this market goes higher.  Breaking to new highs could set off another round of short-squeezes and that upside momentum could continue convincing new investors to volunteer to be the next greater fool.  If they are giving away money, we might as well take it.

Trading Plan:
We trade when the odds are in our favor.  That typically means buying when we don’t want to buy and selling when we don’t want to sell.  It is a little too easy and comfortable to own this market, so it is probably a good time to take profits and wait for the next trade.  If a long insists, they could move a trailing stop up to 1,775 and see where this goes.  A short could take a stab at this with a stop above recent highs.

Plan your trade; trade your plan

Boiling a Lobster

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

MARKET BEHAVIOR
The slow motion slide continues for a third day.  The givebacks have been minor, less than 1/3 of a percent each day, on light and declining volume.  The market remains above previous resistance at 1,775 and is well above the 50 and 200dma.

MARKET SENTIMENT
So far everything looks great.  We are near all-time highs and the market is not fretting over a looming catastrophe.  This has to be the first time this year the market is not obsessing about something.  Even the last three-days are nothing to worry about since down-days are part of every advance.  This dip is so modest and orderly, few are worried about it.

But here is the thing, the market rallied through 2013 in spite of a nearly constant barrage of fear and pessimism.  You could even say the rally fed on it.  While it is great everyone feels so upbeat, should we be concerned about this shift in sentiment and outlook?

Declining volume shows many are not interested in selling this weakness.  Low-volume was very bullish this year.  The lack of selling keeps supply tight and makes it easier for prices to rally.  But no matter how tight supply is, we still need enough demand to keep up.  More than a bearish headline, the biggest risk for this rally is running out of buyers.

While I am not a bear by any stretch of the imagination, it is often noted that bull markets top on good news.  This is the headline that finally signals all clear and invites the last of the holdouts to jump in.  But no matter how great things look, markets decline without new buyers.  Between the elimination of fear and bullish feelings following Yellen’s confirmation hearings, could that be the good news that got everyone in the market?

There is a fundamental difference between headline driven selloffs and running out of buyers.  Unexpected headlines send everyone rushing for the exits at the same time, markets drop precipitously, but they find a bottom quickly.  The emotion and herd driven selling capitulates relatively quickly and allows the brave contrarian to buy heavily discounted shares from fearful sellers.

Demand driven selloffs are completely different.  Everyone feels good and they largely ignore weakness, assuming it is yet another buyable dip and they would be foolish to sell the weakness.  The market slips slowly, failing to raise any alarms or make holders nervous.  This is analogous to boiling an oblivious lobster by raising the water temperature one degree at a time.  In individual stocks we’ve seen this behavior in AAPL and TSLA.  Are we on the verge of seeing the same thing in the broad market?

While I am reluctant to call a top, the recent change in sentiment and outlook is enough to concern me.  The best trades are the hardest to make.  Owning this market feels way too easy and that makes me suspicious.  We profit by owning risk, not comfort.  Things feel too comfortable for my taste.

TRADING OPPORTUNITIES
Expected Outcome:
It’s been a great ride over the last 12-months, but we all know this cannot go on forever.  No doubt I am likely premature, but it feels like sentiment is shifting and that invariably triggers a new a behavior from the market.  Maybe we trade sideways for a while.  Maybe we dip far enough to bring fear back into the market.  We won’t know when and how far this will go until we are in the middle of it.  Right now 1775 is the key level to watch.  After that it is 1740 and then the 50dma.

Alternate Outcome:
These things always go further and longer than anyone expects.  We are twelve-months into this rally leg and there is no reason it needs to end here.  As long as people keep buying the dip, this market will continue marching higher.  The current stretch above the 200dma doesn’t even come close to the record.  Doubting this market is going against the trend and countless traders have died for the cause of “too-far, too-fast”.

Trading Plan:
It all comes down to risk versus reward.  What is the upside from holding here as compared to the downside?  How much higher can the market go in the remaining months of the year?  How far can it fall?  While it can easily continue higher, a modest reward might not be worth taking an outsized risk.  We are in this to make money and the only way we can do that is by selling our winners.

MSFT daily at end of day

INDIVIDUAL STOCKS
TSLA slipped to recent lows and gave back most of yesterday’s bounce.  While there is lots of room for this stock to bounce back, in situations like this it is better to be a little late than a lot early.  Wait for this stock to find a bottom before jumping in.  That means holding current levels for at least several more days and then buying the high volume bounce off a key level.

AAPL is holding support above $510, but other than that small ray of hope, the stock is lifeless.  The recent product launches and big name investors failed to reignite the growth stock.  While the dividend is nice, that might be the best part of owning this stock over the next decade.

On the other side of the fence, MSFT is near 10-year highs as investors cheer an impending change in leadership.  It also doesn’t hurt that the Windows phone doubled market share.  While the numbers are much smaller than the iPhone and Android, they are making the largest share gains, largely at the expense of BBRY.  It will be interesting to see what direction the next management team takes these promising phones and tablets as consumers start demanding full-powered mobile devices.

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What happened to all the bears?

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

MARKET BEHAVIOR
Stocks notched new highs out of the gate, but stumbled into the close.  The market is well above prior resistance at 1775 and we will see how it responds if it retests support in coming days.  The 50dma is over 50-points away the 200dma is lagging by 150-points.

MARKET SENTIMENT
The market hit the skids when Carl Icahn made bearish comments regarding this market.  There are two ways to spin this.  First is this is only one man’s opinion and it is trivial to the big picture.  On the other hand, if this rally is so fragile that a single guy’s comments knock it down a peg, what will happen if there is a legitimate piece of negative news?

There has been a dramatic reversal in sentiment over the last several weeks.  A month ago bulls were an endangered species and many polls showed only 1 out of 5 respondents were optimistic.  Now it is the bears who have become scarce as their numbers are reaching similar lows.  Clearly the market rallied strongly from those bearish lows as all the pessimists converted to bulls and threw their money at the market.  But is the pendulum getting ready to swing the other direction?

Source: Yahoo Finance 11/18/2013

In another Yahoo Finance poll, only 19% said they were bearish.  Everyone else was already invested and holding on for higher levels.  But the thing to remember is we only reach higher levels when new buyers bid up prices.  If everyone is already in the market, where are we going to find these new buyers?  Many point to the bond market and Main Street, and I completely agree, but that is the multi-year, secular bull story.  It takes years for those tides to turn and we are still in the early stages, but as traders, we exploit near to intermediate shifts in markets.  That means we need to focus on the money already in the market and ready to buy tomorrow and next week, not next year.  By most indications, much of that money is already committed to this rally and there are few cynics left to convert.  Another popular sentiment measure is the Stocktwits SPY stream.  It spent most of the last year well under 50% as cynics refused to believe in this Teflon rally, but now that all the risks have been removed and we have nothing but clear skies, it ramped up to 68% bullish.

Anyway you slice and dice this, bullish sentiment is getting frothy and it is no surprise that a single comment by a widely respected hedge fund manager could trip up the market.  Now the question is traders with cash will buy this 0.3% dip, or wait patiently for better prices in coming weeks.

Source: Yahoo Finance 11/18/2013

TRADING OPPORTUNITIES
Expected Outcome:
While I think the market is poised to pullback, the size of the consolidation is up in the air.  This could simply be a retest of support at 1775, or we could crash 150-points and run into the 200dma.  What matters is how quickly this bullish fever breaks.  If we fall 20-points and everyone starts scrambling for the exits, then it will be a quick pullback.  But if we dip slowly and most make excuses for the weakness and keep their bullish outlook, that means we will slide further and longer.  Over the summer and fall we saw swift downdrafts arising from Syria, Taper, and Default.  That quick turnover allowed us to quickly find a bottom.  But if we don’t have a fear driven catalyst and instead slip slowly on weak demand, that will draw this out and likely go further than most expect.

Alternate Outcome:
Like everything in the markets, there is no easy sentiment signal to trade.  One time the market tops at 50% bullishness.  The next time it is 63%, and the time after it continues rallying well past 80% bullishness.  While 68% on Stocktwits is the highest its been, we could have said the same thing about 63% or 58%.  This thing might keep going well past 75%.  But that is the market.  If this were easy, everyone would be rich.  We very easily could recover the Icahn selloff and continue higher as we suck in the last of the holdouts.  There is always money to buy stocks, it is simply a matter of converting a fear of heights into the fear of being left behind.

Source: Stocktwits $SPY 11/18/2013

Trading Plan:
It is hard to buy the market here.  We don’t have a news driven upside surprise since we already removed all the headline fear hanging over the market.  As a rule, we buy the market when it feels dangerous, not when it feels safe, and clearly this is the “safest” this market’s felt in well over a year.   If there is a coiled spring, it is to the downside as this giddiness deflates on either a bearish headline or simply running out of new buyers.  Long-term bears are giving up in frustration, making this the most attractive place to short the market in quite some time.  We can use recent highs as a stop-loss for any new short position.

INDIVIDUAL STOCKS
What is there to say about TSLA that hasn’t already been said?  As a trade, the problem with holding for the top is no one knows when we are at the top.  Dipping to $180 was simply another routine pullback before climbing above $200.  Then we slipped to $150 and clearly that was the wrong time to get out because the stock was on the verge of bouncing.  And here we are at $121.  A few months ago I suggested locking in profits near $150.  Clearly I was early since the stock went up another 30%, but at this point, selling at $150 looks pretty darn nice.  Never forget we are in this to make money and the only way to do that is selling our winners.

Plan your trade; trade your plan