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No deal, but markets are optimistic

By Jani Ziedins | Intraday Analysis

S&P500 daily at 11:48 EDT

MARKET BEHAVIOR
Stocks surged at the open on hopes of a resolution to the looming Debt Ceiling.  The market is less than 1% from all-time highs as it largely priced in a deal.

MARKET SENTIMENT
We popped following the collapse of the House GOP’s alternative to the budget/debt crisis, meaning there are not competing solutions to be fought over.  Ideally the House will vote on the Senate compromise and find enough moderates from both sides to pass the bill without support of extremists on either side.

Markets are forward-looking and anyone waiting to buy the compromise is already too late.  Safety and profits are rarely mentioned in the same sentence on Wall Street and to make money we need to buy risk when the odds are in our favor.  Over the last couple months, nervous traders sold at steep discounts, creating profit opportunities for more confident investors.  To be successful at this game, we need to recognize when selling is slowing down and creating entry points for opportunistic traders.  There is no such thing as a risk-free trade, but paradoxically the more nervous we are, the safer the trade, and the safer we feel, the riskier the trade.

TRADING OPPORTUNITIES
Expected Outcome:
The rebound continues in spite of the political bickering.  I expected a little more volatility due to the stream of headlines leaking out of negotiations, but the market is holding up better than expected because most of the nervous are already out of the market, leaving few to sell each bump in the road.

Without a nervous dip ahead of the compromise, we will likely see a pullback following the surge/short-squeeze on a deal.  Buy-the-rumor, sell-the-news is a frequent occurrence when prices rally strongly into an expected event and there are few left to buy the news.

Alternate Outcome:
With only hours before the much hyped Oct 17th deadline, we could see weakness Friday morning if we don’t have a signed deal.  Passing this deadline is mostly psychological in nature because the US Govt won’t start missing payments for a couple more weeks.  While we don’t want to get in the way of a declining market, most likely any weakness ahead of the deal is a buying opportunity since traders will quickly look past this episode before the ink is even dry.

Trading Plan:
The market wants to keep heading higher, but buying a deal here is late in the game and will likely pullback either before or after a compromise is reached.  The right time to buy the dip is when everyone is scared, not when most assume a compromise is imminent and a post-deal surge is widely expected.  More cautious traders that bought the dip can move up their trailing stop or sell into recent strength.  While there is likely more upside, we are in this to make money and we can only do that by selling our winners.  Always have a plan to take profits.

Trade your plan; plan your trade

Waiting on DC

By Jani Ziedins | Intraday Analysis

S&P500 daily at 11:59 EDT

MARKET BEHAVIOR
Stocks opened weak as the political debate rages on, but resulting trade stayed in a tight range above 1700.

MARKET SENTIMENT
If we believe the headlines, we are on the verge of getting a deal out of the Senate, but how the House reacts is anyone’s guess.  No doubt there will be many Tea Partiers that will vote against anything, so it is really a matter of Boehner putting a compromise up for a vote and then splitting the GOP between moderates and fundamentalists.  From there we have to reconcile the Senate and House bills.

The Oct 17 deadline is really just an invented date and passing it doesn’t automatically trigger a default.  At this point it seems likely this debate will carry past the deadline since it will take time to merge the two chamber’s bills, but we can probably stretch through the weekend without roiling the markets.  We might get another credit downgrade, but Wall Street saw how trivial the economic impact was following the 2011 S&P downgrade, so it shouldn’t lead to a large selloff here.  Further, the ratings agencies saw how S&P lost credibility when they downgraded US debt and it continued to increase in value.

So far the daily trading pattern has been opening weak as traders are disappointed with debate dragging on and bears hoping to jump on a market selloff, but then recovering losses by midday as the selling fails to gain momentum and we run out of sellers.  Headlines don’t matter when anyone afraid of them is already out of the market.  We saw this train coming from a mile away and anyone expecting a Default bailed out weeks ago.  Those still hanging on show a willingness to own in the face of these headlines and are not rushing to sell every bump in the road.  Success in the market is not anticipating headlines, but understanding how traders will react to these headlines.  No matter how bad it sounds, if there is no one left to sell, markets hold up due to tight supply.

TRADING OPPORTUNITIES
Expected Outcome:
The market largely expects a resolution and much of those gains have already been priced in.  We could see a dip back to the 50dma if be wake up Oct 18th without a deal or we could see a sell the news after a deal is reached.  But that is what markets do, they go up and then they go down. We’ve had four up days pull us off recent lows and red days are inevitable.  I don’t expect a large selloff following a deal letdown since this entire event was invented in Washington and has no real structural impact for the economy or the markets.  This was a speedbump and soon we will back to normal.

Alternate Outcome:
While most expect us to avoid default, the market is afraid of the consequences if we plunge off the cliff.  While we have cooler heads hammering out a compromise, no doubt there will be a lot of resistance from the rank and file when the bills are put up for a vote.  Expect this to drag on past the Oct 17th deadline.  If previously confident traders see this as a hard-line and wake up Friday morning, selling everything they have at the open, we could see a cascade of selling take us lower.  While unlikely, we need to be wary of a spooked market.

Trading Plan:
Anyone waiting to buy the resolution will be too late.  And not only that, many expect the market to pop on a resolution, meaning it is largely priced in.  At this point it is a bit late to chase the rebounds strength and it is better to wait for the impending pullback, either as the debate drags on, or we sell the news following a resolution.  Many shorts are hoping for a default plunge and their covering will provide a one day short squeeze, but expect buying to dry up since most bulls already own the market.  No matter what, a bullish market should hold the 50dma and violating this means we need to reevaluate our bullish outlook.

Plan your trade; trade your plan

Signs of hope

By Jani Ziedins | Intraday Analysis

S&P500 daily at 2:48 EDT

MARKET BEHAVIOR
Stocks slipped at the open as a Debt Ceiling deal remains elusive.  We are within days of default, but the market remains relatively calm and is less than 2% from all-time highs.  We recovered the 50dma last week and are holding near 1700 in anticipation of the inevitable Debt Ceiling/Gov’t Shutdown compromise out of DC.

MARKET SENTIMENT
Stocks recovered from last-week’s lows of fiscal doom-and-gloom as the fear of default transitioned to expectations of a last-minute deal.  While the market seems bipolar when it changes its opinion so quickly, we must remember it is not a single entity, but a collection of individual opinions.  The appearance of contradictions arises due to a churn in ownership as those that feared default sold at a discount to investors looking past current headlines.  As we ran out of fearful owners rushing for the exits, supply dried up and we bounced on the confidence of new owners expecting a resolution.  Markets are not about what will happen, but what people think will happen.

Source: Yahoo Finance

TRADING OPPORTUNITIES
Expected Outcome:
While we still don’t have a deal, stocks are holding up as most expect one over coming days.  While this leads to near-term support and stability, it also mitigates the size of upside following a deal.  Since most of the rebound occurred in anticipation of a deal, there isn’t much left to follow the news.  This will likely turn into a buy the rumor, sell the news trade, so there is little reason to chase a breakout.  That doesn’t mean the market will rollover, just that the grind higher will resume and traders will have plenty of time to get in on their terms.

Alternate Outcome:
Since most expect a resolution, that leaves lots of downside if we fail to reach a deal.  A default will send a stampede of sellers rushing for the exits at the same time.  This is the Black Swan trade, a low probability outcome with catastrophic consequences.  A prudent trader will protect long positions with cheap insurance and an opportunist could place a low-cost bearish bet that will pay off handsomely if the low-probability event becomes a reality.

Trading Plan:
The high probability trade is owning this market, but watch the Black Swan closely and recognize a default could send us down 15% in a matter of days.  While we could buy the dip last week, as second dip on default is one to be avoided and even shorted.

Plan your trade; trade your plan

Short squeeze on signs of compromise

By Jani Ziedins | Intraday Analysis

S&P500 daily at 2:22 EDT

MARKET BEHAVIOR
Stocks gapped higher on an apparent softening of the standoff in DC.  Stocks recovered the 50dma by midday as shorts scrambled to cover.  The surge reclaimed support at 1680 and unwound two and a half days of what now looks like fearful, herd selling.

MARKET SENTIMENT
While we don’t have an agreement from our politicians, the shift in rhetoric by both sides signals they are moving toward a workable solution.  This alleviates some of the worst-case fear that stubbornness would push us into default.  While there are still risks this fragile coming together will blow up over minor details, in typical market fashion, prices surge in anticipation of a deal and anyone waiting for the news confirmation will be a day late and a dollar short.

Much of today’s rebound is driven by short-covering and the rate of gains will taper, possibly even pullback after shorts finish covering.  Lets be clear, we haven’t ended the standoff and should expect ongoing political posturing to continue contributing to volatility, but the sharp selloff the last couple days shook free many of the weak holders, leaving far more confident owners in their place.

Source: Yahoo Finance 10/10/2013

As we discussed yesterday, many long-viewed investors saw little reason to sell the near-term political uncertainty and this tightened supply once the more active traders ran out of stocks to sell.  Fundamentals and headlines don’t move markets directly, only supply and demand does that.  No matter what the news or trader expectations, when we run out of sellers, we bounce on tight supply.

TRADING OPPORTUNITIES
Expected Outcome:
Know when to hold’em, know when to fold’em.  Savvy traders sell strength and buy weakness, but most often our gut instinct is to buy strength and sell weakness.  There is a very elusive line between confidently holding through a temporary dip and stubbornly riding the market lower.  That fine line is the difference between winning and losing.  Of course the least stressful trading strategy skips this ambiguity and sells strength, letting others debate holding or selling the weakness.

While the market is going through a temporary reprieve from the risks of default, this political battle is far from over and we are simply delaying the day of reckoning.  While a meeting of minds shows a more conciliatory side of our politicians, expect the rhetoric (and volatility) to pick back up in coming days and weeks.

Alternate Outcome:
While our politicians can be commended for moving a few inches off their initial positions, they have not changed their goals and are simply buying more time to fight for their positions.  Recent flexibility from Obama is rekindling hope in some that they can continue pushing on Obamacare.  While that is obviously a non-starter, that threatens to return this standoff to square one and reignite fears of a default.  Just when we start feeling better about the political process, our elected representatives do something to disappoint us.

Trading Plan:
Tough day to be a short and shows why counter-trend trades need to harvest profits early and often.  On the other side, bulls should expect some of this euphoria to pass as the political bickering resumes.  There is little urgency to chase this rebound since we will likely consolidate between 1680 and 1700 until the debt ceiling is actually lifted.  At the same time, the market is buyable for anyone looking to get in.  Keep a stop under the 50dma and shorts can use this same level to re-short the market if negotiations breakdown and a default is back on the table.

TSLA daily at 2:22 EDT

INDIVIDUAL STOCKS
AAPL is up, but failing to keep up with the broad market’s gains.  While the rally back to $500 was impressive, the last few weeks of sideways trade killed most of that momentum.  Everyone still loves AAPL, but that is its biggest problem.  Companies like NFLX and FB staged spectacular turnarounds because they were some of the most hated stocks following their high-profile selloffs.  AAPL never reached that wide level of disdain and ridicule, meaning it is not ready for a similar comeback.

TSLA is still holding above the 50dma.  A breather after such a strong move is normal and expected, but watch for a wave of stop-loss selling and shorting to hit the stock if it dips under $160.  If this leg stalls, the stock is buyable.  If it accelerates, watch out as the crowd rushes for the exit at the same time.  Remember, TSLA is just a stock and a meaningless piece of paper once it stops going up.  If you love the car, buy one, but don’t fall in love with the stock.

Plan your trade; trade your plan

Are markets complacent?

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:09 EDT

MARKET BEHAVIOR
More weakness as emotions run high ahead of the looming Debt Ceiling.

MARKET SENTIMENT
The best way to classify market participants isn’t fundamental/technical/momentum/value, but timeframe.  Traders and investors have holding periods ranging from fractions of a second to decades and that says a lot about how they trade and their effect on near-term supply and demand.  Why this matters is it gives us clues to who might buy or sell at any given time.

Several big money managers came out publicly and said they have no intention of selling the debt ceiling weakness.  Bears point to statements like that, claiming it is proof of complacency.  No, that is simply the product of a longer time horizon.  Anyone who is looking ahead six or twelve months is not paying much attention to a two-week political standoff.  The only reason they follow near-term weakness is looking for opportunities to buy discounted shares, and that is exactly what these managers said they plan on doing.

Most daily price moves are driven by shorter-viewed traders trying to anticipate headlines and market moves.  We will start with the extremely active High Frequency Traders.  This is a billion dollar sliver of a trillion-dollar market, yet this small pool of money accounts for more than 50% of the daily trading volume.  We can say similar things about day and swing traders.  They are a very small group as measured by combined portfolio size, but because they trade hundreds of times a year, they carry far more influence in daily market moves than institutional money that holds positions for a year or longer.

Right now short-term money is selling by the fistful ahead of the widely expected crash.  While these active traders have a lot of influence over daily price moves, their limited size means they don’t have the firepower to extend moves.  When shorter viewed investors sell the headlines, but longer-viewed investors continue holding, that means the downside move will stall as soon as the short-term traders run out of money.  In June selling stalled and ended that selloff.  The same thing happened again in August.  While there are no guarantees in the market and selling often shakes the conviction of previously confident bulls, longer-term investors unwillingness to sell near-term headlines is supportive and bullish because it keeps supply out of the market.

TRADING OPPORTUNITIES
Expected Outcome:
While it is hard to be confident in environments like this, current worries are as artificial as the politicians causing them.  Assuming our political leaders don’t take us off the cliff, these issues will be behind us in a matter of weeks and this weakness is a buying opportunity.  While that is a big assumption, the only way to make money in markets comes from taking risks; traditionally the bigger the perceived risk, the bigger the ensuing reward.

While the rhetoric is as divisive as ever, a likely resolution is coming to light that lets both sides save face and kick the can down the road.  Obama wants a “clean” bill and the GOP wants face-to-face negotiations.  That means we will likely get a small lifting of the debt ceiling and budget extension, leading to more structured deficit and tax negotiations between the parties over the next month.  While a similar resolution lead to the arbitrary Fiscal Cliff and Sequester, that is still preferable to continued gridlock and default.  By most measures the market and economy swallowed the Sequester without problem, so a sequel is not necessarily a bad thing.

Expect the volatility to persist and a minor relief rally on a temporary extension of the budget and debt ceiling.

Alternate Outcome:
As long we continue marching toward default, there is a real risk we will crash and burn.  While political gridlock is SOP, failing to pay our bills will have very real consequences for our economy and ability to sell debt in the future.  Short-term treasuries are the oil that keeps money moving in our economy.  Perception of liquidity and zero-risk is what makes Treasury Bills an attractive vehicle for banks and major employers to hold liquid funds.  Cut that off for even a couple of days and people can no longer get loans or make payroll, sending the economy into temporary chaos.  This has never happened before and no one knows how it will end, meaning the market will sell first and ask questions later.

Trading Plan:
Tuesday’s selloff triggered stop-losses under recent lows and flushed out many of the hopeful, leaving us with a larger percentage of owners less concerned about the near-term political noise.  This is potentially supportive of current levels.  There is no reason to catch a falling knife, but if we hold these levels for a couple more days, it suggest the emotional selling ended and most owners are willing to continue holding this uncertainty.

If we avoid default, most of the selloff has been realized and this is a decent place for a bear to take profits.  The best way to trade a default is using cheap options as a lottery ticket in the unlikely case our politicians take us off the cliff.

And of course there is no reason to be in the market here.  Hopefully many bulls locked in gains at higher levels and are looking for a good entries to take advantage of these discounted shares.  Savvy bulls embrace pullbacks because they let them make even more money.

AAPL daily at 1:10 EDT

INDIVIDUAL STOCKS
AAPL remains in between $500 and the 50dma, but it is resting just above this rapidly rising moving average.  While it doesn’t have the same influence as levels where large numbers of traders bought or sold shares, it is widely followed and often used in forming trading opinions and outlooks.  Rumor is the iPad refresh will happen later in the month with the 10″ iPad adopting the Mini’s slim design and the Mini getting a Retina display.  These are nice incremental gains, but because iPads are not subsidized, we see a much slower upgrade cycle as compared to the iPhone.  Buyers will appreciate these enhancements, but expect most iPad owners to stick with their current model.

The broad market uncertainty is taking the air out of TSLA as it finally tests the 50dma for the first time in several months.  While not a fundamental flaw in the story, we have to be careful with any stock that has come as far as quickly as TSLA has.  TSLA’s bubble will likely burst on a fundamental catalyst, meaning recent weakness is likely a buying opportunity, but you need an iron gut to hold this one when it is down 10%+ over a few days.

Plan your trade; trade your plan

Slicing through the 50dma

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:11 EDT

MARKET BEHAVIOR
Stocks are selling off  as the political gridlock in DC rages on.  We are clearly under the 50dma and broke recent lows, triggering a new wave of stop-loss selling.  The next level of support is back at the August lows.

MARKET SENTIMENT
Tentative bulls hoping to profit from a quick resolution pop are getting chased out as the fear of a default increases with each day.  Traders are not selling because they think these negotiations will end in calamity since most rationally recognize we will put this speedbump behind us in a matter of weeks.  They are selling because they fear the market will collapse under their feet and are trying to get out first.  The problem with emotional selling like this is they are giving discounts to more bold traders willing to hold through this uncertainty.

While it is no fun to see a position lose money, we need to look past the headlines and see what comes next.  While a default seems unlikely, a more realistic outcome is another US debt downgrade.  In 2011 the S&P downgrade lead to a sizable selloff and is what bears expect here, but back then we didn’t understand the consequences of the S&P downgrade.  Having lived through it, most realize the downgrade was trivial as US Treasuries actually increased in value.  Markets fear the unknown and when it comes to ratings agencies opinions on US debt, we now know they don’t mean a whole lot.

Some big money traders are trimming their positions as the market comes in, but others are looking to buy their favorite stocks at a discount.  There was little reason for big money to chase stocks near all-time highs given the headline uncertainty, but now that prices have dipped to more attractive levels, longer-viewed investors are starting to buy the dip.

TRADING OPPORTUNITIES
Expected Outcome:
Expect volatility to persist until the political gridlock is behind us.  The best trades are often the hardest to make and the more this market sells off, the more profit opportunity it gives us.  We are traders and should embrace volatility, not fear it.  The August selloff ended with a swift plunge under the 50dma and today could also be a similar capitulation point.  Don’t expect a sharp rebound, and we can wait for the market to find support before making any news buys.

Alternate Outcome:
Most expect our politicians will push us to the brink, but not go over.  While that means most holders anticipated this volatility and are unphased by it, what is not priced in is an actual default.  We’ve seen credit downgrades before, but an actual default is uncharted territory and the market will sell off hard if our politicians take us there.

Trading Plan:
The lower we go, the more upside the rebound has.  It is not wrong for a longer viewed investor to own in anticipation of the expected resolution, but adjust your position size to account for the increased volatility and risk.  And of course there is no reason to have a position on at all.  The best trades are when the wind is at our back and this choppy market is a tough place for both bulls and bears.  We have at least another week of this political gridlock in front of us and expect the volatility to persist.

Plan your trade; trade your plan

Sideways chop continues

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:07 EDT

MARKET BEHAVIOR
Stocks slipped in early trade following an unproductive weekend in DC.  While the market is disappointed by the lack of progress, stocks only gave back Friday’s gains before finding support.  As uncertain as the headlines appear, up to this point the market is content trading sideways near previous highs.  The market is holding the widely followed 50dma, but failing to hold this the next major level of support is the August lows.

MARKET SENTIMENT
Stocks are chopping sideways as neither bounce nor breakdown attracts follow on buying/selling.  This is consistent with the wide expectation the political drama will stretch to the 11th hour, but ultimately get resolved.  A Yahoo Finance poll shows the overwhelming majority expect a protracted debate, but a resolution prior to default.  This outlook supports prices as most owners are unwilling to sell the headline noise since they view this as temporary drama.

Over the last four-years, traders suffered flashbacks to the 2008 Financial Crisis and predicted doom and gloom around every corner.  They were trading like it was 2008 in 2010, 2011, and 2012.  This lead to sharp selloffs following every hiccup, but over time traders realized this was not 2008 and every bump in the road did not smother the recovery.  This is why recent events are not nearly as volatile as they were a couple of years ago.  What was a 15% crash three years ago is a 3% dip today.  Owners have come to the realization the budget and deficit are simply temporary roadblocks and not a major structural deficiency.    When looking ahead six-months, it is easy to for bulls to ignore the near-term noise and continue holding in spite of the immediate headline risk.

Source: Yahoo Finance 10/7/2013

The sideways chop comes from short-term, headline driven traders who buy good news and sell bad news, but since they are such a small piece of the overall market, their buying and selling stalls quickly.  The more interesting dynamic revolves around the expectations of a resolution and limited weakness leading up to this widely expected event.  With so few people selling the headlines, there will be fewer traders to buy the resolution.  No doubt we are 3% lower on the uncertainty and a resolution will remove that, but it is setting up an interesting “Black Swan” trade.  While the high-probability outcome is a resolution and modest pop, on the off-chance our politicians screw this up, that would trigger a dramatic sell off.  Black Swan trades are akin to playing the lottery.  Most of the time you lose, but when you win, you win big.  The best way to take advantage of a Black Swan opportunity is buying cheap, out-of-the-money options as a hedge for a long position, or an outright bet.  Protracted negotiations are already priced in, but a default is not and that creates a trading opportunity.

TRADING OPPORTUNITIES
Expected Outcome:
The high probability trade is sideways chop until a resolution and then a modest pop on the elimination of this uncertainty.  Since the selloff has been so modest, the expect rebound to be equally modest.  Most of the buying will come from short covering and then we resume the previous debate over Taper, economy, and earnings.  Since we are in a bull market, that trend will likely continue into the end of the year.

Alternate Outcome:
There are no guarantees our politicians will get it right.  Since the US Govt has never defaulted on its debt, no one knows what to expect and that will lead to weeks uncertainty and fear of the worst case.  Not paying bondholders will create a liquidity crisis as some employers are unable to make payroll and banks are unable to lend money.  Even a few day delay will ripple through the economy and  no doubt going forward investors will no longer look at US Treasuries with the same sense of security and negligible risk.  This will affect our Govt’s ability to borrow money and the interest rates we pay on that debt.  Things will get ugly if we default and will likely trigger a swift 10-15% selloff

Trading Plan:
The market is trading sideways waiting for a resolution.  While the high probability outcome is a modest pop when a deal is reached, there are opportunities for a Black Swan trade using out-of-the-money options to hedge a long position or make an outright bearish bet.  At the current time, the market is stable and scary headlines are not triggering an avalanche of selling.  That likely means the spring is not coiled to the downside and shorts are better served locking in recent profits.

TSLA daily at 1:07 EDT

INDIVIDUAL STOCKS
AAPL is stuck in between the 50dma and $500.  Virtually all of the major bullish catalysts are behind us, a new iPhone and increased the dividend.  About all we have left before year-end is an expected refresh to the iPad lineup.  It is hard to be long or short the name in no-man’s land and a trader should wait for a breakout/breakdown.  For the time being, AAPL is mostly dead money as it continues its transition from beloved growth stock to boring dividend stock.

TSLA is currently the hottest momentum stock  and recovering nicely from a viral car fire video that spread through the internet and mainstream press last week.  So far the company has responded well to this situation and it is not a risk to future sales.  Those that want to buy a Tesla will still buy one.  The bigger question is how deep this pool of buyers is.  While we’ve seen long wait-lists for exciting new cars like Toyota’s FJ Cruiser and Ford’s redone T-Bird, sales of both of these vehicles eventually tanked  because there was little demand after the core group of buyers got theirs.  $100k is a lot of pay for a 3rd car and will be a major hurdle once all the rich early adopters have theirs.  TSLA is on to something here, and there is a lot of excitement around the brand, I just wonder how many of the people who gush about the car can actually afford one.  At this point, the biggest risk to the stock is a sales plateau once the backlog is caught up and is the most likely event to burst this bubble.

Plan your trade; trade your plan

Ignore what everyone is talking about

By Jani Ziedins | Intraday Analysis

S&P500 daily at 12:50 EDT

MARKET BEHAVIOR
Stocks were modestly higher as the Shutdown stretched on for a fourth day with no end in sight.  Through midday trade, the market continues holding support at the 50dma for the fifth consecutive day and remains near the upper end of the summer’s trading range in spite of the headline driven uncertainty.

MARKET SENTIMENT
As obsessed as traders are over developments in Washington, or lack thereof, the market is holding up remarkably well, only down 2.6% from all-time highs.  Most bears claimed a gov’t shutdown was not priced in, but the resulting trade proves otherwise.  This is just another example of the more people talk about something, the less we need to worry about it.

While most investors recognize the temporary nature of the Shutdown, there is greater concern over a potential default on Federal debt.  There is no precedent for this and the longer the budget and debt ceiling standoff continues, the closer we come to this deadline.  Nerves remain relatively restrained so far because Boehner assures us the GOP will not allow us to default.  At least that is one thing both sides agree on.

Moving past politics, we’ve seen relatively limited selling in spite of the uncertainty.  This means those afraid of the Shutdown bailed out a while ago, while those still holding are not focused on near-term headlines.    Bulls and bears alike expect the market to pop on an eventual resolution, so no one wants to be the guy who sold just before that bounce.  With so many owners sitting on their hands, that limits supply and keeps a floor under the market.

Successful investors don’t think about what the market should do, but what other traders are doing and how that affects future trade.  With all the worrywarts already out of the market, we hold up quite nicely in spite of the headlines and political posturing.

TRADING OPPORTUNITIES
Expected Outcome:
When the market should crack wide open, but holds firm instead, that means our core thesis is flawed and we need to reevaluate.  Strength in the face of this uncertainty is bullish because it shows most holders don’t want to sell no matter what the headlines scream.  The resulting tight supply makes it far easier for the market to stabilize and ultimately rally once this situation is resolved.  Since the selloff leading up to this was fairly modest, don’t expect a powerful rebound.

Alternate Outcome:
With each passing day, those expecting a quick resolution sell to more confident investors with a longer view.   The one assumption most holders have is this situation will be resolved without too much damage to the economy or markets.  While this is still the most likely outcome, there is a chance this political game of chicken goes horribly wrong.  At this point the GOP’s pride and credibility is at risk and could result in them stubbornly holding out long past what is rational and reasonable simply for the sake of saving face.

Trading Plan:
Stocks are holding the 50dma, all be it with some sideways chop.  The most adventurous can buy support with a risk adjusted position size, but they should recognize the real risks of new lows next week.  But holding support for this long in the face of this uncertainty means we are not poised to crash lower, meaning the real risks of owning are not as large as they feel.  Most of the time that reality vs emotion skew sets up a favorable risk/reward.

Shorts waiting for the market to split wide open should reevaluate their positions because the market had every opportunity and invitation to sell off, yet is holding firm.  That likely means there are fundamental flaws in the bear’s thesis that need to be identified and considered.

Expect volatility to persist, but continued support suggests a crash on current headlines is unlikely.

TSLA daily at 12:50 EDT

INDIVIDUAL STOCKS
AAPL is holding the 50dma, but cannot reclaim $500 following the successful launch of the iPhone5s.  While there was a lot of excitement leading up to the new product cycle and strong rally up to $500, but the rally is stalling.  Maybe we are simply building a base and consolidating recent gains before resuming higher, but the thing that makes bases work is it convinces many the run is over and so far shareholders remain upbeat.  Many billionaire investors have come out in support of AAPL, but that concerns me because it means most of these people are already fully invested.  If everyone believes in this story and already owns shares, who is left to buy?  Things that are too high usually keep going higher (TSLA) and those that are too cheap usually keep getting cheaper.  Unfortunately AAPL falls into that latter group.  I’m sure the company will do fine, but the stock could easily be entering a mature phase, meaning it is more attractive for its dividend than price appreciation.  This happened to previous titans of tech and it is foolish to assume AAPL is different.

Speaking of TSLA, the stock is bouncing after a couple of days of sharp selling following another downgrade and a battery fire caught on video.  So far the stock is respecting the 50dma, and remains holdable, but this stock is extremely extended from its original pivot point and that makes each subsequent breakout less likely to succeed.  Remember, all stocks are bad unless they go up.  DO NOT fall in love with TSLA.  Date it and leave it when the ride is over.  While we might still see some upside, this is clearly a momentum/bubble stock and anyone arguing to the contrary risks giving back all their profits when it inevitably returns to a more reasonable valuation.

Plan your trade; trade your plan

Bipolar markets

By Jani Ziedins | Intraday Analysis

S&P500 daily at 12:45 EDT

MARKET BEHAVIOR
Stocks are lower by midday as the market continues fretting over the Shutdown and Debt Ceiling.

MARKET SENTIMENT
Bulls have control for a couple of days, then it is bears turn.  That is what choppy markets do.  The thing to remember is a very small pool of traders are driving this volatility while everyone else is sitting on their hands.  We have short-term traders jumping all over each move, but the moves quickly fizzles when larger investors don’t participate in the buying and selling.  As I write this, the market is dipping under 1675 as weak bulls and confident bears that follow every tick are selling by the bucketload.  But what we are more interested in is what will happen when this small group finishes selling.  Will it shake free stock owners with a longer view that are already looking past the Shutdown/Debt Ceiling/Taper?  Will opportunistic traders with a longer view gladly buy the discounted shares from the impulsive sellers?  We will soon know the answer.

The problem many investors have is they follow tick-by-tick moves and that leads to impulsive trading decisions.  The market goes up and everything is fine, the next day it goes down and the sky is falling.  The truth is nothing changed from yesterday.  We are stuck with gridlock in DC, but we also know a deal will eventually be reached and this is nothing but a bump in the road.  Smart money is trading bigger economic factors and not paying attention to the near-term noise.  This is why these sharp moves higher and lower don’t go anywhere.

TRADING OPPORTUNITIES
Expected Outcome:
In choppy markets the worst thing is buying strength and selling weakness, yet that is the gut reaction of most traders that follow these daily moves.  Bulls who bought yesterday’s strength are selling todays weakness.  Buy high, sell low makes a poor trading strategy.  But before the bears gloat, they did the same exact same thing on Monday as they shorted the widely expected Shutdown, but were chased out by the Shutdown rally.  In choppy markets we buy weakness and sell strength, and by all measures we are in a choppy market until the situation in DC is resolved.

Another thing worth taking note of is how little the market declined on the political gridlock signals the size of the pop when this situation is eventually resolved.  This is not the November 2012 lows that leads to a powerful six-month rally.

Alternate Outcome:
With as little selling as we have seen ahead of this, that means plenty of downside remains if things turn out worse than expected.  So far investors are taking the longer-view and ignoring most of this political circus, knowing full well it will be resolved in a handful of days and selling the fear here is foolish.  But that theory only holds up as long as the market does.  Once traders’ screens are filled with red, they start questioning their resolve and eventually reach the point where the desire to get out overpowers the logic of staying in.

Trading Plan:
Early weakness pushed us below the 50dma and triggered a wave of stop-loss selling under this widely followed technical level.  Stay out of the way if selling accelerates, but if the move lower stalls, it means most of the selling is behind us and it is safer to own the market.  Longer-viewed investors can continue holding knowing this uncertainty will eventually pass in coming weeks.  Aggressive shorter-term investors can continue buying weakness and selling strength as this volatility will likely continue into next week.

Plan your trade; trade your plan

Still holding up

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

MARKET BEHAVIOR
Stocks opened lower as the gov’t shutdown carried into the second day and hope for a quick resolution evaporated.  The market tested and bounced off of the 50dma for a second day, eventually recovering almost all the day’s losses by the close.  As fearful as the headlines are, the market is holding this widely followed moving average and staying near the upper end of the summer’s trading range.

MARKET SENTIMENT
The hope of a quick resolution is fading as the more likely outcome is morphing into a two-week shutdown that simultaneously addresses the impending Debt Ceiling debate.  The gov’t shutdown is giving us lots to talk about, but the consequences are fairly minimal and is why most market participants are not rushing for the exits.  Those that feared these events had plenty of notice and pulled out days or weeks ago, leaving few to sell the news.

The bigger question revolves around the debt ceiling and the prospect of a default.  While the Tea Party is willing to drive us off a cliff to prove a point, there are enough moderate republicans that will break ranks before it comes to that.  Of course there are no guarantees and that uncertainty leads to near-term volatility.

One of the more interesting phenomenons is watching the illiquid pre/post market moves as compared to the more liquid primary markets.  Tuesday and Wednesday mornings pre-markets were down as traders sold/shorted the budget impasses headlines, but as soon as the market opened, few of the big money institutional traders sold.  These guys are taking a longer view of events and are less worried about a few week bump in the road.  There are major structural issues we need to be wary of, but short-lived partisan bickering is not one of them.

TRADING OPPORTUNITIES
Expected Outcome:
Going into our third day of shutdown, fewer are expecting a quick and painless resolution, but so far the markets are holding up as most owners recognize the short-term nature of this disruption.  While we might see more volatility as this drags on, this is not a fatal economic flaw and any weakness is a buying opportunity.

Alternate Outcome:
The Dems are calling the GOP’s bluff and it will be interesting to see if Boehner backs down or stubbornly digs in his heels.  If Obama and the Dems don’t give him a bone to call a success, pride might push him, and us, over the edge.  While we hope cooler heads will prevail, with egos this large it is hard to know exactly what will happen.

Trading Plan:
The market had every opportunity to plunge, yet here we stand, holding recent support.  That speaks well of support at these levels and shows few owners are willing to sell here.  While we should expect volatility to persist, it is not out of the realm of possibility to see the market rally in anticipation of a resolution.  Of course that could lead to a buy the rumor, sell the news scenario and we might actually want to sell the pop.

If the market holds up on Thursday, being long with a risk adjusted position size is not a bad trade.  Bears expecting the market to crack wide open need to reevaluate their analysis because the market just isn’t responding as expected.  Often that means the next move will be in the opposite direction.

Plan your trade; trade your plan

Gov’t Shutdown, a Bullish Catalyst

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

MARKET BEHAVIOR
Stocks marched higher in the face of the gov’t shutdown, respecting support at the 50dma.  Standing strong in the face of such obviously bearish news means the market is not standing on a trapdoor and is positioned well to continue the uptrend.

MARKET SENTIMENT
Who would have thought a gov’t shutdown was a bullish catalyst, yet here we are, up nearly 20-points from yesterday’s weak open.  That’s what we get for thinking.  The fundamentalist and casual observer are flabbergasted by this “irrational” market.  A gov’t shutdown is so obviously bad that the market should tank on the news.  How can the market be so naive to rally on the news.  It makes no sense………or does it?

The key is how obvious the sell off should be.  What means is most saw it coming and were able to sell ahead of time.  This proactive selling virtually eliminating all the selling pressure following the event because all the potential sellers are already out.  Markets don’t move on fundamentals, only supply and demand.  When there is no one left to sell the news, supply tightens up and markets rally.  This market is behaving perfectly rational when we analyze it from the right point of view.

TRADING OPPORTUNITIES
Expected Outcome:
The big takeaway from today’s move is all the sellers are out, meaning most of the downside has been realized.  Any bear looking to capitalize on this headline is a day late and a dollar short.  Obviously a protracted, multi-week shutdown is a different animal, but so far most owners are comfortable holding through moderate volatility and political drama.

Alternate Outcome:
While a shutdown was already priced in, the market likely expects a prompt resolution.  A continued shutdown through the week will pressure the market as a worse than expected scenario comes into play.  Market stability actually takes some pressure off the GOP and gives them a little more flexibility to dig in and play hardball.  But ultimately this issue will be resolved and is not a structural problem in the financial system.  At worst this is a speed bump that will be in our rearview mirror in a couple of weeks.

Trading Plan
Stick with what is working.  The market is respecting support and every dip this year has been buyable.  While shorting opportunities exist, counter-trend profits need to be taken early and often.  Buying this bounce is risky and we will likely see more volatility as this story unfolds, but as traders we only make money when we take risks.  Recent lows under 1675 are a decent place to keep a stop for anyone adventurous enough to dip a toe in.  Realistically we will see more sideways volatility and could dip under recent lows before this is done, so any buyers should use smaller positions and give themselves room to avoid being shaken out unnecessarily.

Plan your trade; trade your plan

AM: The party of NO

By Jani Ziedins | Intraday Analysis

S&P500 daily at 12:30 EDT

AM Update

MARKET BEHAVIOR
Stocks gapped lower at the open given the high-probability of a govt shutdown, but within minutes bounced and recovered half of the losses.  This dip challenged the 50dma, giving back 50% of the recent rebound, but so far it is holding support.  Two-steps forward, one back.

MARKET SENTIMENT
Ironic how the Tea Party is acting just like a labor union by using extortion to get what they want.  If they don’t get their way, they shut the whole thing down and screw everyone.  They hate it when the other guy does it, but it is okay when they do it.  Of course it would be naive to think politics works any other way.

The unfortunate thing for the Republican party is this strategy is branding them as the party of “no”.  While Obamacare is not popular, most of the public concedes we need some kind of healthcare reform and is hungry for alternatives, yet the only idea out of the GOP is to go back to the old way.  They are missing a golden opportunity to win the public over by providing solutions.  The GOP made huge strides in the ’90 with its “Contract with America”, but that was back when they had ideas.  Now all they look like is crybabies throwing a tantrum.  The public is dissatisfied with Democratic leadership, but as long as the GOP looks worse, the Dems have nothing to worry about.

But enough politics, the early panic never gained momentum and was more of a buying opportunity.  Many traders expected budget problems, but they sold last week, meaning there were few left to sell the news today.  While there might be a few hopeful left that will sell tomorrow when there is no overnight resolution, most of the owners who held through the August swoon are not worried about this temporary budget speedbump.  While it dominates headlines, I have not heard anyone claim the gov’t will remain shut down for months, meaning this is not a major structural problem, simply some political noise injecting temporary uncertainty in the market.

TRADING OPPORTUNITIES
Expected Outcome:
The most successful traders buy fear, not sell it.  The time to sell was two-weeks ago when everyone was giddy and expecting the 100-point rebound to continue to the moon.  Many longer-viewed investors still in the market are probably better served weathering this storm.  No doubt we must stick to our stops, but hopefully any short-term investor with a trailing stop is long out of the market and actively looking for an attractive entry.

Alternate Outcome:
The Tea Party might cut off its nose to spite its face and is the big risk here.  This is a high-stakes game of chicken and things will get ugly if someone doesn’t flinch.  Dems feel the public is on their side and will come out ahead from a shutdown, so they are less willing to compromise.  Obamacare is Obama’s legacy and he will never sign a bill that guts it, so unless the GOP yields, this will get ugly.  We will soon find out if the Tea Party is willing to die for their cause and take the rest of us down with them.

Trading Plan:
The market is holding up remarkably well since the consensus is the gov’t will shut down Tuesday.  This shows a lot of the fear is already priced in.  That likely means we are on the verge of a buying opportunity.  No need to get in front of this thing, but if the market remains stable through a shutdown, that resilience is buyable.  Bears can hold their shorts, but they should look to lock in gains if we don’t crash lower on bad news.  That means most of the negative headlines are priced in and the coiled spring is pointed higher.

Plan your trade; trade your plan

AM: Down but hanging in

By Jani Ziedins | Intraday Analysis

S&P500 daily at 12:36 EDT

AM Update

MARKET BEHAVIOR
Stocks slipped as traders fretted over the impending Congressional votes and potential govt shutdown.  We dipped under 1690, but early weakness didn’t trigger a cascade of stop-loss selling.  The market is nervous, but not panicked and we are only 2.3% from recent highs.

MARKET SENTIMENT
The half-full view is holders are confidently sitting on their positions, knowing this is the wrong time to sell.  The half-empty view is such a small pullback means there is still tons of downside left.  The truth probably lies somewhere in between.

Only the extremist thinks the US Govt is on the verge of going out of business.  Most rational traders expect the debate will be heated and ugly, but in a few weeks it will be ancient history.  There is little doubt Congress will increase the debt limit because they have no choice, the fear is how long this drags out.

In reality, this is just a bump in the road that comes up every couple of years.  Sometimes it slips under the radar when it is rubber stamped.  Other times political parties use it to extract concessions for programs they disagree with.  Right now the GOP is threatening to go nuclear over Obamacare.  The question for the market is if this is just political posturing and a negotiating tactic, or if the GOP is actually suicidal and willing to drive the car off the cliff.  That is the main source of uncertainty here, but this is nothing close to the structural problems we had in 2008 with the Financial Crisis.  Our politicians will figure something out and the market will rally on the relief.  Then it is on to the next worry, likely a return of Taper headlines.

One of the things that keeps this pullback more constrained is many of the weak jumped out in August’s selloff.  Those that fear Debt Ceiling are likely afraid of the Taper too.  That means most of the potential Debt Ceiling sellers are already out of the market.  No matter what the headlines say, we need people selling stocks to push the market lower and so far few are selling these headlines.  Trade people and their portfolios, not the headlines.

TRADING OPPORTUNITIES
Expected Outcome:
The market is holding up relatively well given the headline risk.  Either owners are oblivious to the dangers, or the fearful have already bailed out.  The August dip cleared a lot of dead wood, meaning there is less to get rid of this time.  Likely this pullback is just a little cooling off following the sharp 100-point rebound.  The Debt Ceiling will be ancient history soon enough and these discounts are buying opportunities.

Alternate Outcome:
The Tea Party’s hatred for govt spending and Obamacare is the wildcard in the mix.  Do they have enough influence in the GOP to shutdown the govt to prove a point?  We will soon find out.  While the risks of driving off the cliff are great, the probabilities are slim.  This creates an interesting “black swan” trade.  Buying some cheap, out of the money puts is akin to playing the lottery.  The chances are winning are slim, but the rewards are great.

Trading Plan:
The market is holding 1680 as expected (50% retracement of recent gains) and is closer to a buy point than a shorting opportunity.  The longer we hold these levels, the safer it is to wade in despite of the headline risk.  Bears have the wind at their back, but still cannot get the job done, meaning they are far weaker than most realize.  Plan ahead of time where you will buy and sell and stick to that plan.

Plan your trade; trade your plan

AM: Day number 4

By Jani Ziedins | Intraday Analysis

S&P500 daily at 12:42

AM Update

MARKET BEHAVIOR
Stocks surged at the open, but turned around nearly as quickly and we are trading near breakeven by midday.  So far the market continues holding near 1700 as neither bears nor bulls have the strength or will to break this logjam.

MARKET SENTIMENT
Typically the fourth day testing support reveals which side has the upper hand.  Sucker’s rallies and temporary support is driven by a small group of dip buyers.  Within days they run out of money and the selloff resumes.  Holding support for four plus days shows investors with deeper pockets are buying the dip, or alternately bears ran out of sellers and the move lower stalled because there is no one left to sell the fearful headlines and weak trade.

While today’s trade is weak, it doesn’t seem to be shaking many out of the market.  Recent volatility chased off anyone afraid of Taper and traders had an open invitation to sell Debt Ceiling headlines over the last week.  Those who feared these events had plenty of time to get out and anyone that bought demonstrated a willingness to own risk.

Markets crash when they are caught off guard and right now everyone sees Taper and Debt Ceiling coming from a mile away.  This rally will rollover like everyone one before it, but it will take something new and unexpected.  Ignore the headlines and fear the things no one is talking about.

TRADING OPPORTUNITIES
Expected Outcome:
The market is holding 1690 and we could see a little more weakness, pushing us down to 1675, but if the selloff stays calm and orderly, this is a buying opportunity, not a shorting one.  Selloffs are swift and violent.  Trading sideways with fractional declines is the opposite of swift and violent.  The churn is giving traders the opportunity to sell the Debt Ceiling, but expect those to rush back in when the situation is resolved.  In typical fashion, expect the market to rally in anticipation and anyone buying the news will be late to the party.

Alternate Outcome:
The market is uneasy leading into the Debt Ceiling and looming govt shutdown, contributing to this modest weakness, but most expect it will be resolved without too much fuss.  There is the risk our politicians act especially stubborn and force a govt shutdown.  While most know this will eventually be resolved, the uncertainty will pressure the market and nothing shakes investor confidence like a crashing prices.  At that point it becomes an emotional sell first, ask questions later.

Trading Plan:
There is no reason for the nimble own this sideways chop.  Hopefully many locked in profits up above and are looking to buy back in at lower levels.  Maybe we bounce off 1690, or maybe it is 1670, but keep watching for a good entry point.  Longer-term investors can ignore all this noise because in three months the Debt Ceiling and Taper will be ancient history.  As for shorts, holding near 1700 for a fourth day is not encouraging and they should look for opportunities to lock in recent profits.

FB daily at 12:43 EDT

INDIVIDUAL STOCKS
Who would have thought FB  would be one of the hottest momentum stocks?  This is a perfect example of sentiment trading.  It was the biggest and most talked about IPO in a generation.  It dominated headlines and countless funds were buying shares over the counter in anticipation of a huge surge following the IPO.  Unfortunately for many, the IPO hype marked the top  and the stock crashed, eventually becoming the butt of many jokes.  The stock everyone wanted to own was soon the stock no one would admit to buying.  The most loved company quickly because the most hated company and that was finally the time it became buyable.  Don’t trade technicals or fundamentals, trade people.

Plan your trade; trade your plan

PM: The 2% crash

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

PM Update

MARKET BEHAVIOR
Stocks finished at the lows of the day and continued the streak of consecutive down days.  The market closed under 1700 for the second day, but for all the bleeding, the market is only down 2.1% from all-time highs.  The market seems attracted to the 50dma and the 1680 level that provided resistance and support stretching back as far as May.

MARKET SENTIMENT
This selloff feels scarier than the numbers indicate.  Five consecutive down days is the biggest losing streak of the year, but the damage is only pushing us back to levels first seen last week.  Emotion driven selloffs are swift and breathtaking.  The only breath this dip is taking is from all the people talking about it.  It is crazy the number of naysayers that are promoting the end of the world and pointing to a 2% decline from all-time highs to prove their point.  Sure this weakness is making recent buyers uneasy, but that is how hot markets cool off before continuing higher.

All the media coverage is focusing on the impending govt shutdown, but we’ve been down this road before and anyone who reactively sold that weakness came to regret that decision as the market bottomed and resumed the uptrend weeks or months later.  Complacency is the accusation bears are constantly throwing around, but I hear far more talk about a Debt Ceiling/Taper collapse than bulls talking about buying the dip and 1800 here we come.

While I agree complacency is creeping into the market as every dip this year has been buyable, but complacency by itself is not a fatal flaw and is more often a bullish catalyst.  Complacent owners continue holding through thick and thin, keeping supply tight and allowing smaller demand to keep pushing us higher.  Complacency isn’t the enemy here, but lack of demand.  So far there has been enough better than expected news to force bears to buy back their shorts and win over some of those sitting on the sideline.  That is why this “complacent” market keeps making new highs.

Many are waiting for all these scary headlines to pass before believing in this market, but by then it will be too late and they will be buying the top.

TRADING OPPORTUNITIES
Expected Outcome:
The market keeps looking for a bottom and might dip to 1675ish before this rebound finds its footing and resumes the climb higher.  We will bounce on some constructive debt ceiling headline and everyone will credit that random news story for the surge to new highs, but the recent pessimism flowing into the market is the fuel that will propel the bounce.

Alternate Outcome:
While the market is uneasy approaching the Debt Ceiling negotiations, most traders expect a compromise to be reached within a reasonable timeframe.  If both sides dig in, refusing to budge and threatening to default on debt payments, that nuclear option isn’t priced in and could lead to a swift 10%+ selloff.

BBRY daily at end of day

Trading Plan:
If the market regains 1700 on Thursday and holds it through the close, it appears like the selling is drying up and all it takes is one optimistic headline to launch another leg higher.  If we continue sliding, that means buyers are shying away and the lower we go, the closer we get to the tipping point of emotional selling.  Holding 1700 is buyable and accelerating through the 50dma is shortable.

INDIVIDUAL STOCKS
BBRY is proving that something that looks too low often keeps going lower.  Anyone who bought the dip is learning first hand the dangers of catching knives.  It will ruffle a few feathers, but can we identify any similarities between the ubiquitous “crackberry” and the unmatchable iPhone?  BBRY failed to keep up with an evolving market.  Is AAPL falling victim to the same tech turnover?  Looking at the nonstop slide in market share for the iPhone and iPad, it sure is hard to argue “this time it’s different”.

Plan your trade; trade your plan

AM: How negotiations work

By Jani Ziedins | Intraday Analysis

S&P500 daily at 12:29 EDT

AM Update

MARKET BEHAVIOR
Stocks sank under 1700 in early trade for the third consecutive day, but so far the weakness failed to trigger a cascade of stop-loss selling.  Constrained selling after a large move is a normal and healthy part of moving ahead.  While we might still have a date with the 50dma, orderly selloffs and consolidations are typically bullish.

MARKET SENTIMENT
The unbridled enthusiasm for continued QE vanished as quickly as it arrived.  We know Tapering is coming, so a three or six month reprieve is not that big of a deal in the big picture.  The same thing would have happened if the Fed started taper.  While the knee jerk reaction would have been in the opposite direction, it would have quickly recovered because markets look forward 6-months.  It came to terms with Taper this summer and already moved on to the next thing.

Now that Syria disappeared from the headlines, the focus turned to the impending Debt Ceiling.  There are two things the public doesn’t want to know how they are made, sausage and laws.   Republicans and Democrats are already positioning themselves for the negotiations.  There is a pretty standard template for negotiating that applies equally well to buying a car or negotiating arms treaties with other nations.  Step one, act aloof.  Step two, ask for absurdly more than you are willing to accept.  Step three, call off the negotiations and walk away halfway through.  Step four, reach a hard-fought compromise at the very last second.  That’s how it worked every other time and is how it will work this time around.

People often complain about how dysfunctional Congress is, but those people only show how little they understand negotiations.  Further, a ridiculously low approval rating means our govt is working, not broken.  At the end of negotiations, if someone is happy, it means the other side got screwed.  Remember this the next time you buy a car.  If the dealer is smiling and in a good mood, you are not getting a good deal.  Only when the dealer is grumpy and on the verge of kicking you out, have you finally reached rock bottom.  When both Republican and Democrat constituents feel they are getting screwed, we finally reached the ideal compromise between the two positions.  If Congress had a 50%+ approval rating, it means someone is getting screwed big time because someone else is getting everything they want.  Negotiations work best when both sides leaved pissed off.  Each side had to give up some things that were important as a concession to get the things that really mattered.  Neither side has a monopoly on the truth and the best solution lies somewhere between the two positions.

That is the lowdown on why we should expect ugly Debt Ceiling discussions, but don’t need to worry about them.

TRADING OPPORTUNITIES
Expected Outcome:
As long as the selling remains contained, the rebound is intact.  We broke under 1700 multiple times and didn’t trigger a wave of stop-loss selling, meaning there are not a lot of fearful traders on the verge of hitting the panic button.  While complacency will eventually be a problem, in the meantime it keeps supply tight and is propping up this market.

Alternate Outcome:
While we know the Debt Ceiling debate will be ugly but will eventually be resolved, getting sucked into the heated argument will make the market nervous since it often worries about the worst-case.  We could see the market pullback if the Republican standoff carries us over the line and they threaten default again.  They likely learned their lesson from the markets last time, making casual comments about default unlikely, but you never can tell with these guys.  They want to blow up Obamacare and might go nuclear to do it.  While that is a reason to be cautious and respect our stops, the volatility creates buying opportunities as we buy discounted shares from the fearful.

Trading Plan:
Holding near 1700 for another day shows this is more than just dip buying.  The profit-taking, preemptive selling, and out right shorting run their course in the first few days of a pullback.  Once that selling dries up, it clears the way for a continuation higher.  Three-days into this is a little early to claim the coast is clear, but things are looking better.  Even a pullback to the 50dma is not a lot to worry about as we consolidate recent gains.  Any bears that were lucky enough to short the top of the market, look to lock in profits if the market doesn’t continue the move lower by tomorrow.

Plan your trade; trade your plan

Holding support

By Jani Ziedins | Intraday Analysis

S&P500 daily at 3:40 EDT

MARKET BEHAVIOR
Stocks bounced back from early weakness and reclaimed support at 1700.  This is the second day we’ve tested and held this level.

MARKET SENTIMENT
The euphoria following Summer’s withdrawal evaporated as quickly as it came.  We gave back all those gains and any late buyers are sitting on losses.  This is why savvy traders buy when everyone is fearful and sells when everyone is getting comfortable.

The market got a little ahead of itself, rallying 100-point in three-weeks and this pullback is normal and expected.  While it rained on the bulls’ parade and brought life back to demoralized bears, that is exactly what it needs to do before we can continue higher.  As we discussed earlier, big money hates buying breakouts and all-time highs.  They wait for the euphoria to pass and buy the pullback.  So far they are buying 1700 and is why we are finding support.  Of course two-days doesn’t make a bottom and we need to hold this level for two more days before we can feel more confident big money supports these levels.  Without their endorsement, this brief pause at support will continue lower as soon as the dip-buyers run out of money.

Source: Stocktwits 9/24/2013

Bullish sentiment on Stocktwit’s SPY stream went from 26% to 60% over a couple of weeks as the market bounced off 1630 and notched new all-time highs.  The last few days brought that back to a more palatable 46% percent.  Recent sellers and shorts will be buyers of the next leg higher.  Of course we might need to see a little more selling or sideways trade before we are ready for the next move.  A dip to the 50dma creates an even more irresistible entry point for big money.

TRADING OPPORTUNITIES
Expected Outcome:
While the medium-term outlook is positive, near-term we might see a little more selling.  Buying here is picking a bottom and we typically wait at least four days before buying support.  A dip to 1680 is attractive because it creates an even better entry point for the swing trader.

Alternate Outcome:
Discussion of the debt ceiling is heating up and while most are aware of it, we have short memories and often forget just how ugly these things get before a compromise is finally reached.  Last time the threat of a default lead S&P to downgrade the nation’s credit rating.  Obviously that was a joke because bonds rallied on the news, but it shows just how contentious these things can get.  Expect the rhetoric to heat up and spook investors as we approach the deadline.

Trading Plan:
Buy the market if we firm up around 1700 over coming days and short crashing through the 50dma.

The recent dip to 1630 shows us how we make even more money when we are wrong.  If we originally bounced off 1680, that is 50 fewer points we could make on the rebound.  Sure we lost a little when we got stopped out, but I appreciate the volatility because that creates bigger opportunities.  While I would be “right” if we bounced off 1700, I would make more money if we dipped to 1650.  This is just one reason why being right and making money are two very different things.

AAPL daily at 3:40 EDT

INDIVIDUAL STOCKS
AAPL is flirting with $500, but has yet to break through this key level.  The company smashed sales records with its iPhone5s/c launch, but this is also the first time the company sold phones in China on the launch day, so obviously that skews the data and makes direct comparisons meaningless.

Clearly the company sold a lot of phones to the faithful that are willing to stand in line to have the newest AAPL gadget, but this is a small sliver of the market.  While it is great PR to have the news show people lining up to buy the latest Apple phone, the only thing that matters is how attracted average people are to these upgrades.  The smartphone market is evolving in two directions, larger screens and cheaper phones.  Right now AAPL is stuck in no-man’s land with a small and expensive phone, explaining most of their market share losses over the last couple years.  While the stock market cheered the 9 million phone sales, this pop is selling opportunity, not a buying one.

TSLA is bouncing around the $180 level, but it sure would be nice to see the stock form a base and shake out some of the momentum chasers.  Even a dip under the 50dma would be a great way to clear the deck.  Locking in profits at $185 is not a bad trade since the stock will inevitably pass through this level again in a future dip or rebound.  Even if you believe this is the next GM, take some profits and look to buy it back cheaper.

Plan your trade; trade your plan

Pulling back to support

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

MARKET BEHAVIOR
Stocks dipped to support at 1700 in early trade.  100-points over a few weeks is a big move and retesting support should not come as a surprise; the bigger question is how the market responds.  We are at the upper end of the summer’s trading range and that gravity is trying to pull us back in, but every trading range ends and so will this one.  The transition from summer to fall is often a directional catalyst and why Sept and Oct often lead to large moves.  So far big money is more willing to buy than sell and that pulled us off the 1630 lows.

MARKET SENTIMENT
Nothing like 30-points of selling to rain on the Bull’s parade.  Current headlines promote an impending showdown over funding Obamacare and a potential govt shutdown.  From what I gather, many are not bearish because they expect fiscal calamity, but because they think other people will panic.  That is a very nuanced, but important distinction.  Selloffs happen when people become scared and sell, not when they expect others to become scared.

To breakdown under the strain of DC politics, we need people to be caught off guard by the headlines and right now a budget showdown is widely expected.  Anyone afraid of these impending headlines is already out of the market, meaning there are fewer left  to sell the news.  Further, recent examples of political discord were buying opportunities, not a cause for concern, so expect far fewer traders to impulsively sell the headlines.  That likely means this “sell the rumor” dip will be a bump in the road.

Markets don’t move on what traders expect others to do, but how they trade their accounts.  Most of us are wired with the same biology and learned trading from similar schools of thought.  That means more often than not, what we see and think is what everyone else is seeing and thinking.  If we are afraid of an impending collapse and sell ahead of time, a lot of other people did the same thing.  This shared view is what leads to the appearance irrationality.  People are convinced the market should do one thing, yet it does the complete opposite.  The market isn’t acting irrationally, it simply reacts to a supply and demand the only way possible.  When the crowd sells early, it prices in what everyone is afraid of and paradoxically the market will go higher when the news comes out because there is no one left to sell.  Right now the crowd anticipates problems over Taper and debt ceilings, meaning they already acted on this “insight” and it is already mostly priced in.  It is irrelevant that we are all-time highs, the only thing that matters is most people are aware of this impending calamity and those that fear it already sold.  This doesn’t mean we cannot selloff another couple dozen points, but it does mean much of the downside is already priced in and we have far less to fear than the naysayers claim.

TRADING OPPORTUNITIES
Expected Outcome:
Stocks retested support as expected, so no one can claim the sky is falling just yet.  Even another 20-points of selling is a normal 50% retracement of recent gains.  Two-steps forward, one back.

Alternate Outcome:
The market is far less fearful of the debt ceiling.  Politicians are quickly becoming the boy who called wolf with all this grandstanding and posturing.  While it will be ugly, most expect a deal to get done at the last-minute and is what the market is pricing in.  What isn’t priced in is a catrosphoic game of chicken where both sides go down in a ball of flames.  While the high probability outcome is a workable resolution, the black swan is a complete breakdown of reason, leading to a far larger move.

Trading Plan:
While the high probability outcome is higher, we must respect the risks and honor our stop losses.  Bouncing off support is buyable.  Slicing through the 50dma is shortable.

Plan your trade; trade your plan

Sliding to support

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

MARKET BEHAVIOR
Stocks are lower for a second day following Wednesday’s breakout to all-time highs.  The market remains above the summer’s 1600/1700 trading range leaving us to decide if the market is entering a new phase of directional trade or if the sideways trade sucks us back in.  Buy the breakout, or sell the strength, that is the million dollar question.  Friday was options expiration, so the extremely high volume is not comparable to typical trading days.

MARKET SENTIMENT
Traders are notoriously afraid of heights and reluctant to chase breakouts, especially when they are nervous about impending headlines.  Watching buying pause here is normal and expected, but what we are most interested in is how owners react to these new highs.  Are they locking-in profits and selling too-far, too-fast, or are they holding on for more gains?  The modest pullback over the last couple days suggests most are still holding.  Obviously in a group as large as the market we will have some traders sell the breakout and this is contributing to modest weakness over the last two days, but current selling is more stream than tidal wave.

Even when most buyers remain reluctant, we can still move higher if existing owners continue holding and keep supply tight.  That is the stuff low-volume rallies are made of.  While conventional wisdom says we cannot trust low-volume moves, that is a myth.  We are 10-months into a low-volume rally that keeps making higher-highs.  Demand is only half of the picture, tight supply is just as powerful.

Source: Yahoo Finance 9/20/2013

There were a couple more Yahoo Finance polls the last couple days showing just how “overly bullish” the market is at all-time highs.  Twenty percent are not worried about a bigger selloff and in a different poll, another twenty percent think stocks are a bargain.  I would hardly call one out of five “overly” bullish, especially since in both polls the bullish response was the least popular choice.  Remember, don’t confuse price with sentiment, they are two very different things.  A true contrarian trades against the crowd, not the price.  Right here the contrarian trade remains believing in this market.  All the doubters are already out of the market, meaning there is little selling pressure left.

TRADING OPPORTUNITIES
Expected Outcome:
Stick with what is working.  No matter what the headlines say, this market continues making higher-highs.  Expect some near-term weakness as profit-takers pressure the market, but once this wave passes and selling dries up, look for the market to add to recent gains.  Markets grind higher, especially in later stages of a rally so we need to be patient.  The most nimble traders locked in recent gains and will buy a bounce off support, but at this stage there is no reason to doubt this breakout.

Alternate Outcome:
Triple-tops, double-bottoms, a person can see whatever they want in the charts.  What we are looking for is strength where there should be weakness and weakness where there should be strength.  While this rebound to new highs caught many off guard, we need to tread lightly if this breakout fizzles and rolls over too quickly.  The expected outcome is support near 1700, anything less and we need to reevaluate our bullish thesis.

Source: Yahoo Finance 9/19/2013

Trading Plan:
A bounce off support is buyable.  Don’t short until we break through support.  Locking in recent gains is not a bad trade given how far we’ve come in a few weeks, but be ready to get back in when the market firms up.

INDIVIDUAL STOCKS
As an iPhone5 owner, I’m  impressed with iOS7 and am glad AAPL finally moved its user interface out of 2007.  As big of a leap as this update is, it is only playing catch up with Android and not a compelling reason to buy an iPhone, just less of a reason to go with Android.  The problem AAPL continues having is it is Jony Ive vs the entire Android community when it comes to finding the next great software innovation.  Because Android is an open operating system, they have thousands of developers tinkering and will likely continue beating Apple to the punch on most software features.  While the Apple faithful waited in long lines to buy the iPhone5s, that was never in question.  We want to know is what the casual smartphone user thinks and we won’t know that for months.

Plan your trade; trade your plan

Holding the breakout

By Jani Ziedins | Intraday Analysis

S&P500 daily at 2:21 EDT

MARKET BEHAVIOR
Stocks are holding most of yesterday’s breakout through midday trade.  This shows a wave of selling and profit taking has not hit the market and enough buyers are willing to step up and pay these prices.  No matter what the headlines say, the market continues making higher-highs and when in doubt, stick with the trend.  Former resistance at 1700 becomes support and we will see if the gravity of this summer’s trading range is strong enough to pull this young breakout back to earth.

MARKET SENTIMENT
Obviously bulls are happy with recent gains, but even they have a fear of heights and are tentative following recent gains.  Given the headline risk, few are actively promoting 1800.  Compare this to many bears’ outlook a couple of weeks ago when they were certain we were destined for 1500.  We have cautious optimism from bulls and extreme negativity from bears.  That skew in sentiment is the fuel that keeps this rally alive.

Obviously the market moves in waves and we go up and down all the time, but the next major down move will only happen when sentiment flips and bears are cautiously pessimistic while bulls are enthusiastic.  Remember, we don’t trade fundamentals or technicals, but people and their portfolios.  As long as traders remain wary of this rally, that means we have a large pool of prospective buyers sitting on the sidelines.

TRADING OPPORTUNITIES
Expected Outcome:
If this breakout holds 1700 over coming weeks, expect the market to finish the year strong.  Traders are notoriously afraid of heights and their reluctance to own this market for the last 10-months left many sitting out.  As these watchers warmed up to this market, or more likely were afraid of being left behind, they started chasing, creating the demand that elevated this Teflon rally to all-time highs.  The more people fear a market, the more prospective buyers we have.

Alternate Outcome:
While current headlines are already priced in, we need to watch for something the market is not prepared for.  Debt Ceiling is the next bogie on the horizon.  Politicians keep kicking this can down the road and the market is growing immune to all the political noise.  Fear of the Fiscal Cliff last fall created an outstanding buying opportunity.  Chances are this time around fewer sellers are going to show up simply because anyone who sold political uncertainty last year regretted that decision.  But this lack of selling ahead of time leaves the market more vulnerable to a worse than expected political trainwreck.  More likely than Debt Ceiling is unquantified risk from a headline that isn’t even on our radar yet.  Stay cautious and defensive.

Trading Plan:
Proactive traders can sell the pop and wait for a pullback to 1700.  Others can continue holding after moving up their trailing stop to just under recent resistance at 1700 or 1709.  Being short here is nothing more than trying to pick a top and we should wait for a material violation of support before betting against this breakout.

INDIVIDUAL STOCKS
AAPL continues the bounce off $450 and recovered half of the recent selloff on favorable reviews of the new iPhone5s.  While no one disputes the build quality fo AAPL products, the question is if these new “innovations” are enough to reverse the market share losses to Android.  In order to compete for market share, they need a large screen phone and a cheap phone, something we still don’t have.  As a business, I respect AAPL’s decision to stick with what they know best, high quality, premium priced hardware.  They have a great brand, reputation, and company and will be a force in the industry for years to come.  But what they are not is the largest and most successful company in the world.  The recent bounce is a good chance for longs to get out and bears to short.  We could make it all the way back up to $500, but it will likely act as a ceiling and the stock will rollover once the initial buzz from the iPhone5s fades.  Longs can hold as long as we stay above the 50dma, but have and respect your stop-losses.

TSLA daily at 2:22 EDT

TSLA is the stock that just keeps on giving, breaking above a recent consolidation today.  We can split this story in two pieces, there is the car company and the feeding frenzy around the stock.  For the company, the make a well received, high-priced car.  It is a very niche brand and more like Maserati than Porsche.  Sure Tesla could expand their product line, but they will eventually face stiff competition from the major auto companies.  The drivetrain is one of the simpler pieces to making, marketing, and selling cars in large volumes.  It won’t take much effort for a F, GM, TM, or BMW to convert an assembly line to electric vehicles and pump those cars through existing distribution channels.  Tesla and Musk have done an impressive job creating a new car company, but it is foolish to think they have a sustainable competitive advantage over other auto companies.  The greatest asset Tesla has is the buzz around the brand, and as we’ve seen with Apple’s rapidly falling market share, those advantages only last so long once lower priced competition shows up.

As for TSLA the stock, it is the go-go momentum stock of the moment.  The strength is aided by the fact many shareholders are insiders and not selling.  The small number of shares available for trade make it easy for limited demand to drive the prices to insane levels.  It is a great ride, but just realize this is only a ride and have an exit in mind.  While the stock can keep going higher, fear a misstep by the company, the “Qwikster” equivalent that sent high-flyer NFLX down 75% over a couple of months.  I have no idea what that might be, it could be a PR disaster like cars catching fire or a fundamental data point like slowing sales once the initial backlog of cars is delivered.  What I wouldn’t fear is analyst downgrades.

Plan your trade; trade your plan