Category Archives for "Free Content"

AM: New highs

By Jani Ziedins | Intraday Analysis

S&P500 daily @ 1:09 EST

AM Update

MARKET BEHAVIOR

Markets surged past resistance at 1420 and are now in line with pre-election resistance near 1430.  All of the Obama reelection selloff has been recovered and the market continues flaunting strength in the face of pervasive negativity.

MARKET SENTIMENT

It is a bad time to be short the market and bears are feeling more pain today as the market refuses to acknowledge their view of the world.  But as we know, markets operate on supply and demand, not fundamentals.  Fundamentals and sentiment can influence supply and demand, but price is exclusively driven by supply and demand and all other factors are secondary.

Because the pessimism is fairly widespread, that view is already priced in.  People trade their views and if everyone is telling you how bad the world is, then they have already traded those opinions.   After they sell, these people are simply cheerleaders since they can no longer dump more supply on the market.  But here is the interesting thing, while the current bears are unable to further pressure prices, they can boost prices if they start buying back into the market.  And that is the heart of contrarian trading.  The crowd cannot push the market any further in their direction, but they can move markets if they change their mind and push the prices the other way    And this rally is doing just that.

TRADING OPPORTUNITIES

Don’t expect the market to go straight up and their will be some turbulence, but we should hold above the 1420 going forward.  If there is material a violation of 1420 that likely means the rally is fizzling.  But a test of 1420 and modest penetration will just be part of digesting these new gains.  Today’s pop is largely driven by shorts getting blow out of the water and their frenzied buying will climax soon and we should expect a little retrenchment.

Stocks rallied on encouraging words out of Washington on progress toward averting the Fiscal Cliff.  Maybe they will actually get something done before the deadline, but you have to wonder if this is a buy-the-rumor, sell-the-news setup forming.  But either way I expect this rally will continue into next year as the economy continues growing slowly and headline events turn out better than trader’s worst fears.

INDIVIDUAL STOCKS

AAPL popped along with the broad market today.  It is getting late in the game for AAPL to announce a special dividend, so anyone hoping for that should adjust their expectations accordingly.  Today AAPL’s price-action is mirroring that of the indexes.  That is progress as the stock is weaning the emotion out of its trade.  Emotion is not an on-off switch, so we can expect more wild swings, but this is part of getting back to more normal trade.

Stay safe

PM: A win for the bulls

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

PM Update

MARKET BEHAVIOR

Markets traded mostly flat on light volume.  Neither sellers nor buyers showed up in force and while it looks like a draw, holding above the 50dma is a win for bulls.  We are within a couple of points of a post-election high and breaking above that would be a technical accomplishment.  Of course we need to wait for the breakout to stick because it could just as easily turn into a double top, dropping us back to the 200dma.

MARKET BEHAVIOR

The market is holding up well giving further hints owners are not ready to sell shares even with all the counterproductive rhetoric in Washington.  Another support day here and it will be time to take a serous look at going long this market.  The real test will come when we break above Dec 3rd’s high of 1424.  If we don’t selloff in a double top, it will be extremely constructive action and we have to take notice no matter what is going on in the headlines or how light the volume is.  Markets rally in the face of pessimism and that could be what is happening here.  All the pessimists already sold to new holders who are comfortable sitting through the Fiscal Cliff volatility.  This attitude creates a self-defeating prophecy where the holders willingness to ride out volatility actually eliminates the expected volatility.   If everyone is holding, supply dries up and the market heads higher.

TRADING OPPORTUNITIES

Another close above the 50dma and this market will show more strength than most give it credit for.  No doubt there is a lot of pessimism around the Fiscal Cliff, Europe, and China, but the only times I can recall when everything was great was just before a major bear market.  This fear of impending doom is also creating a self-defeating prophecy as it holds prices in check keeps the bear in his cage.

My recent bias was for a modest pullback after the recent 75 point rally, but I am reconsidering that near-term expectation.  There is probably a 50/50 chance we’ll avoid a selloff and instead use this sideways consolidation to reset the clock.  Headlines are always a risk in this market, but everyone is expecting us to go over the fiscal cliff so that is already largely priced in. We could see a couple of days of emotional selling, but nothing like what happened after the election.  There was far more hope of a Romney win than a Fiscal Cliff resolution, so that means any Fiscal Cliff selloff to be more modest.  Hope is the fuel of declines and right now hope is scarce.

AAPL daily at end of day

INDIVIDUAL STOCKS

AAPL had another down day.  At this point the stock is so emotional it is largely a coin flip if it will be up or down.  It has completely disconnected from the broad market and is marching to the beat of its own drummer.  It has become a trading stock and is completely divorced any market or company fundamentals.  If it feels too risky to buy AAPL here, then it is probably a good buy for anyone willing to hold through more volatility.

Stay safe

AM: Supporting the 50dma

By Jani Ziedins | Intraday Analysis

S&P500 daily @ 1:12 EDT

AM Update

MARKET BEHAVIOR

The markets rallied modestly in early trade.  There are not many sellers at this level and they are being matched with more than enough willing buyers to support prices.  We are also close to making a new post-election high 1424.  Volume is light, but that is normal for this time of the year.  For as much concern as there is over headlines, the price-action doesn’t reflect this sentiment.

MARKET SENTIMENT

Owners are willing to hold here and the swing-trade is not putting much of a dent in these higher levels.  The recent pullback to 1443 changed the makeup of stock owners as weak-kneed owners sold out to more long-term opportunists willing to buy at a discount and hold through some volatility.  The stability of these new owners is supporting prices so far and we haven’t seen the volatile ups-and-downs that followed past declines in 2010 and 2011 and this summer.

There has not been much progress in Fiscal Cliff talks, but the market seems to be rallying in anticipation of the inevitable deal.  This is pretty standard buy-the-rumor, sell-the-news kind of stuff.  Given the recent rally in the face of stubborn posturing by both sides, it seems the market is okay with us heading off the cliff for a short amount of time.  But even if the majority of smart-money is expecting it, the actual event could spook retail investors and they start selling by the fistful because of media hype.  This could create another profit opportunity like we saw following the election.

TRADING OPPORTUNITIES

Holding above the 50dma is encouraging, but we need to maintain this level for another day to prove there is real buying behind this move and it isn’t just short-term traders propping us up.  Breaking 1424 without selling off will be a strong indication current owners are perfectly content holding and that lack of supply will support of prices.

On the other side, breaking under the 50dma could trigger a wave of selling and that could shake the confidence of many content owners.  Nothing undermines resolve like red splashed across a trading screen.

AAPL daily @ 1:12 EST

INDIVIDUAL STOCKS

AAPL is showing its divergence from the rest of the market with it down while the broad market is higher.  It is now trading in a world of its own as everyone is trying to guess the next move.  This stock has completely separated from the fundamentals and is just a dice game at this point.  Everyone is in the markets for their own reasons, some want to make money and support their families with others are looking for a gambling-like thrill.  All the gamblers are flocking to AAPL and if that is your thing, there is no better place to be.

The supportive thing for the market is while AAPL carried the market on it’s back in the early part of this year, the collapse of AAPL has not weighted on the broader markets as much as expected.  At the time it seems to be a single stock story that is not spreading.

Stay safe

LA: Look for 50dma support

By Jani Ziedins | Intraday Analysis

S&P500 weekly at end of week

Look Ahead

Here is what we can look forward to this week and strategies to trade it.

MARKET BEHAVIOR

The market regained the 50dma late Friday.  Finding new buyers to support prices above the 50dma will be a key component of continuing the current rally.  We are in the middle of the holiday lul and should expect volume to continue slacking off.  Lower volume means more volatility since it is easier for smaller traders to move the market, so expect head-fakes to continue.

MARKET SENTIMENT

The 50dma and 200dma are a key psychological levels for no other reason than so many people follow them.  Congestion around a price level creates more powerful support and resistance because this is where a lot traders actually bought and sold shares.  Emotions of fear and regret will cluster here because this is the point where many traders accounts will move between profit and loss.  Moving averages and round numbers make for noteworthy mile markers but don’t generate the same levels of pain and pleasure for traders who didn’t enter or exit trades at these levels    But the secondary indicators can affect the market’s mood and influence exceptions about what lies ahead.  In many ways these secondary technical levels are self-fulfilling prophecies.

A lot of traders are going to watch how we trade around the 50dma.  If we hold above it, they will buy the market.  If we fall under it they will sell and short.  And if that is what people are going to do, then we want to get out in front of this so we profit from the crowds buying and selling.  We don’t want to be the first one on the bandwagon, but we want to jump on before it is obvious to everyone else.

The market is currently ignoring the Fiscal Cliff debate and is not showing concern about the growing political deadlock.  Both Republican and Democratic leadership have thrown out ultimatums  and I wouldn’t expect either side to back down any time soon.  And the market knows this too, but it doesn’t seem concerned.  While this might be perplexing to the fundamental trader, we trade the market, not the news.

The thing we have to decide is if traders are buying for non-fundamental reasons here and that is creating this support here.  Are shorts buying this market because they cannot stomach further losses?  Are bandwagon traders buying because everyone else is?  If either of those traders are leading the charge higher, we will head lower quickly after their limited buying power dries up.  But if big money vale investors are attracted to these prices, then we will likely continue higher.

TRADING OPPORTUNITIES

The big difference between short-squeezes and momentum traders and value investors is the size of their trading accounts.  Short-term traders drive a lot of the daily volatility we see, but only the large mutual funds can sustain major market moves.  And so the most obvious way to tell who is leading this market is to wait a few days.  If big money is in charge, we’ll hold these levels going forward.  But if the short-term traders are propping up the market without the support of larger traders, this rebound will fizzle and collapse under its own weight.

If the market choses to ignore the Fiscal Cliff and thinks a pullback to 1400 is the only rest it needs, we have to respect that because the market is larger than we are.  It isn’t about what the market should do, but what the market does that puts profits in our accounts.

AAPL weekly at end of week

INDIVIDUAL STOCKS

How can we not talk about AAPL?  Not only is it one of the most widely held stocks, but it also makes up the largest portion of the indexes.  AAPL’s $50 decline wiped out more market cap than most of the companies in the S&P500.

The first thing we need to recognize that AAPL the stock is a lot different from Apple Inc.  Apple Inc. is one of the most profitable companies in the world and growing like gangbusters.  There is nothing wrong with Apple Inc., but AAPL the stock on the other hand has run into significant headwinds.  Call it unrealistic expectations or over-owned,  but whatever it is, the stock is off 25% from its $700 high just a couple of months ago.  Is this stock done selling off?  Is it headed to $400?  Honestly I have no idea.  Has sentiment peaked, or is this just a shakeout?  I think AAPL is getting hit by all these people trading for tax reasons and the stock might liven up closer to the new year when this artificial pressure goes away.  But there are no guarantees because emotional trades go further and longer than most expect.  And lets be honest, at this point AAPL has turned into an emotional trade because it what everyone is talking about.  If you are a gambler, try to pick a bottom.  But if you are in this to make money, wait for the stock to find a bottom before buying in.  Most often we will see a couple false bottoms before the real rebound starts.  One false bottom down, one more to go.

Stay safe.

WR: Recovered early losses

By Jani Ziedins | Intraday Analysis

S&P500 weekly at end of week

Weekly Review

It is important to periodically take a step back and look at the bigger picture because too often the daily noise can be confusing and misleading.  That is the intent of these weekly reviews.

MARKET BEHAVIOR

The market sold off early in the week as Monday and Tuesday finished in the red, but the market rebounded Wednesday, recovering all of those losses.  Interestingly enough, we opened the week by gapping above the 50dma, couldn’t hold that level and traded down to 1398 before bouncing back, ending the week above the 50dma.  Wednesday was the low point in the week and had the highest daily volume in quite some time.  Was this the capitulation point of a modest pullback?    Certainly could be looked at that way.

MARKET SENTIMENT

How a week closes is similar in importance to how a day closes.  Often big money makes their trades later in the week after they had a chance to evaluate market conditions and new fundamental data.  Pros throw their weight around near the end of week and it is important to keep tabs on what they are up to because they have all the money.

The most bullish thing from last week is buyers were willing buy Wednesday’s dip under 1400 and kept pushing the market all the way back above the 50dma.  On the other side we should be asking if this was the last short-squeeze before correcting lower.

The single the most challenging aspects of trading the market is both sides always have extremely compelling arguments for their positions.  The market price is the exact balance point between these two opposing viewpoints and you end up with exactly half the money on each side of the trade.  One side is buying because they think it will go higher, the other side is selling because they think it is time to get out before prices decline.  (there are other reasons to sell, but lets keep this simple)  To be successful, we need to spot group think and exploit opportunities where the crowd is getting it wrong.  For the near-term trade that is hard to do here because it seems both sides are equally matched.  A bad headline could trigger an emotional selloff, or the pervasive pessimism could continue fueling a rally that discounts every piece of bad news thrown at it.

TRADING OPPORTUNITIES

Right now it is hard to get ahead of this market because there is no obvious group-think skewing the crowd one way or the other.  From here the best play is waiting for the market to reveal its hand and then jumping along for the ride.  Holding above the 50dma for a couple more days makes this a buyable rally.  Dipping under the 50dma shows buyers are unwilling to support these prices.

And of course lets remember we don’t always have to be in the markets.  Don’t trade just for the sake of trading.  If you don’t have an edge on the market, take some time off and come back when there are better profit opportunities.  Volume for the rest of the year will trend lower and volatility will pick up as smaller players will be able to push the market around.  That could be enough of an excuse to take a break and come back in January with a rested mind.

AAPL weekly at end of week

INDIVIDUAL STOCKS

AAPL had its worst week in a years.  Resistance at the 200dma turned the stock back down and most of the traders who piled in on the recent rebound from $500 are now under water.  Funny how the market manages to turn the easy trade into the wrong trade.  There are a dozen psychological and economic reasons this happens, but it boils down to if it is easy to buy, it is probably a bad idea.  AAPL’s bounce off $500 sucked in a lot of people and this second pullback barbecued them.  AAPL is quickly going from a buy-and-hold stock to one that should be sold any time you have a profit because two days later it will reverse hard and you’ll be in the red.  The shocking thing is how volatile such a large company is when there is no real news to speak of.  There is no scandal at the top, no PR disaster, no major accident, strike, or disruption, AAPL is making these dramatic swings just because.  You’ll get a dozen reasons out of the financial press and analysts, but the truth is the stock was over-owned and ran out of buyers.  Without buyers, fundamentals don’t matter.

Sunday we’ll look forward to what we might happen next week.

Stay safe

PM: What short-squeeze

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

What happened to today’s short-squeeze.  We closed higher, but it should have been a lot higher.  Did this give us a clue about how this market is positioned and where it is headed?

MARKET BEHAVIOR

Markets closed above the 50dma for the first time in nearly two months.  This would be considered a big win except it came on the heels of a strong employment report that failed to excite traders.  Volume was well below average and it seems many traders have cutout for the rest of the year.  Low volumes can lead to increased volatility as it becomes easier for smaller trades to move the market, so we might expect more unpredictability from the markets in coming weeks.

MARKET SENTIMENT

It was surprising to see the market’s underwhelmed reaction to an unexpectedly good jobs report and drop in unemployment to 7.7%.  The market even traded in the red for part of the day.  It was encouraging to see the market rally into the close and finish near the highs, but it is still curious the market failed to rally strongly on good news given how negative sentiment seems.  In times of extreme pessimism, the markets will vault higher on something as little as less-bad news, yet here we have good news and the market shrugs it off and only squeezes out a 0.3% rally on light volume.

We might infer from the lack of a meaningful short-squeeze the markets are not overly pessimistic.  This is good news for bears and bad news for bulls.  The last few short-squeezes sent bears into hibernation and that lack of shorts in the market is why we didn’t see more upside from today’s news.  The apathetic rally also means there are not a lot of buyers on the bull side left to push us higher either.  Earlier in the week I was reconsidering my thoughts regarding a pullback because of the seemingly widespread negative sentiment, but today’s price action shows bearish positioning is not as prevalent as it sounds.

TRADING OPPORTUNITIES

While we finished the day strong and closed above the 50dma, I’m not sold on this rally just yet.  It still has to prove other buyers are willing to step-in at these levels and we won’t slip back under the 50dma due to lack of follow-on support.  Today’s price action nudged me slightly more negative than I was coming into the day.  I don’t have a lot of conviction in this bearish view, but today’s moves seeded to indicate there is not a lot of upside left the markets right now.  But just to clarify I only expect a brief pullback relating to emotional Fiscal Cliff worries and this will create a buying opportunity once the Fiscal Cliff is in the rear view mirror.

For a near-term trade, look to short the market if we break under the 50dma again and consider buying the market or at least covering shorts if we hang above the 50dma for three days.  Of coures all bets are off if our politicians surprise us all and come up with an agreeable compromise next week.

AAPL daily at end of day

INDIVIDUAL STOCKS

AAPL continues acting like a drama-queen swinging between bouts of enthusiasm and despair.  Everything was great on Thursday and it was all broken again on Friday.  While it doesn’t feel helpful, this price-action is necessary to cleanse an over-owned stock.  Analysts will point to this or that for why we are selling off, but they are overlooking the simple and more accurate reason of supply and demand.  AAPL was perceived as the safest stock in the world and it was flooded with overly optimistic and slightly naive owners who assumed it was a sure thing.  But once everyone and their grandmother had as many shares as they could fit in their mattress, there was no one left to buy and gravity took over.  Now all these late comers are selling for a loss and gladly selling their stock for a steep discount just so they don’t have to endure any more pain.  But their pain is someone else’s gain.

Stay safe

AM: Employment Surprise

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:05 EST

Surprise employment numbers fails to excite the market.  Is this giving us valuable insight into the market’s biases and disposition?

MARKET BEHAVIOR

Interesting price action this morning as the market shrugged off a far better than expected employment report.  It is noteworthy when the market fails to respond to positive news and can be a red flag signaling near-term weakness.  If good news can’t lift the market, what will bad news do?

We opened above the 50dma, but fell back under this psychological level within the first hour of trade.  Failing to hold this level for the second time in just over a week is not encouraging.

MARKET SENTIMENT

The market popped at the open, but quickly fizzled.  The gap was quite modest and short-lived, so it doesn’t count as a short-squeeze because it never put much pressure on shorts.  Most likely early gains were people rushing out to buy the headline and follow-on buying never materialized.  The early rally could be a victim of lack of buying rather than hit by a wave of selling.

People are tearing apart the employment report looking for reasons to doubt the headline number, but that is their cynical bias showing through.  They don’t want to buy this market and are looking for an excuse to ignore an otherwise positive result.  Remember, news doesn’t move markets, people’s reaction to the news does.  This is a subtle, but important distinction.  No piece of news is 100% positive or 100% negative.  There are always nuances to every story and depending on the mood of the market, it can grab on to either side.  With today’s employment report it would be extremely easy for traders to focus on to the headline number and run with it.  But it takes a bullish bias to ignore the negative aspects of part-time work and discouraged job hunters leaving the labor force.  We fell on the other side where the market ignored the headline and sold off due to the negative nuggets contained in the report.  This shows a bearish bias toward the news as traders fretted over details buried in the story.

The employment report is now in the rearview mirror and the market’s attention has already shifted to the next thing.  But we can use this result to gauge the market’s sentiment going forward.  Today’s early price action shows a lot of bearish cynicism and could set the tone for the coming weeks.  If good news cannot lift the market what will?

TRADING OPPORTUNITIES

The unexpected surprise from the employment report didn’t produce the bounce it could have.  That is a very ominous warning.   Of course we need to watch how the market trades through the rest of the day.  Cynics could have taken hold early on but might lose control this afternoon.  This is a volatile market and often the initial reaction to a major story has been wrong.  Which will turn out to be the head fake, this morning’s pop, or the subsequent selloff?  One of them is wrong but it is too early to say.  In recent history, the wrong move corrected within hours.  Will we see the same here?  How the day closes will give us more information.  A weak close could be bad news for the markets as we get closer to the Fiscal Cliff.  A strong close will show traders are already looking ahead and less worried about what is in front of us.

AAPL daily @ 1:06 EDT

INDIVIDUAL STOCKS

AAPL is giving back some of yesterday’s big pop, but still well above yesterday’s lows.  This is turning into a highly emotional stock as it whips around.  Every moment of relief has been followed by another bout of terror.  And this isn’t a one way story, both bulls and bears are getting shredded by this volatility.  This has become a great swing trading story where you sell the rallies and buy the dips.  It will probably keep this up for some time to come as the stock turns over its core ownership base from complacent speculators to steadfast value investors.  Unlike spectacular breakdowns in NFLX and GMCR, AAPL has the fundamentals to back up its valuation.  Heck it is undervalued as compared to the broad market given its dividend and growth.  This is one of the most successful companies in the world and it is trading at a legacy company valuation.  But that doesn’t mean prices can’t continue to decline as emotion overtakes reason.

Stay safe

PM: What to look for tomorrow

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

MARKET BEHAVIOR

Markets finished higher by 0.3% Thursday.  Volume was less than average as traders paused before Friday’s employment report.  We continue trading between the 50dma and 1400, but find ourselves at the upper end of the range, within easy striking distance of an upside breakout.  Of course that also means there is more of room on the downside before we find support at 1400.

MARKET SENTIMENT

Employment numbers will be off slightly due to Sandy’s disruptions, but everyone is expecting that.  The question is how the market will respond to the numbers we do get.  Sandy gives traders a lot of leeway to trade their preexisting bias.  They could say the numbers are disappointing and hit the sell button, or they could rationalize away awful numbers by saying it was just a temporary blip due to Mother Nature.  Either way they have a free pass to trade their bias and we’ll learn a lot about what the market is thinking here.  The other thing to watch for is if the market’s initial reaction is the wrong reaction.  Lately the market has moved strongly after news, but quickly reversed and ultimately sustained a move in the other direction.  Keep an eye out for a similar head fake tomorrow.

Sentiment has been highly bearish surrounding the Fiscal Cliff and it seems few are expecting a last-minute deal.  If that is the majority’s opinion, then it is already priced in.  And honestly, these Fiscal Cliff debates are mostly about what gets cut and who pays more.  It is no longer debating if we get austerity, but who and  what feels the pain.  If we look at it more broadly from a macro-economic view, a compromise will largely have the same effect regardless of who it falls on because austerity is austerity.  The only exception is if they ultimately decide to kick the can down the road and continue the current policy in the name of economic stimulus.

TRADING OPPORTUNITIES

The market is holding up surprisingly well in the face of the political stalemate and near certainty we’ll plunge off the Fiscal Cliff.  If we continue holding up, I’m getting ready to reverse my expectations of a near-term pullback.  I thought there would be an emotional trade lower, but we’re not seeing it and the bearish side of the trade is getting a bit crowded.  It feels too easy to short the market here and you’d have to be crazy to buy this market.  Often the hard trade is the right trade.

As I shared the other day, there are great arguments to be made for a move in either direction.  When we don’t have a clear edge, it is best to let the market make its move and we jump in a little late.  Right now I think the smart trade is to let the market show it’s hand and then jump along for the ride whether it be lower or higher.

AAPL daily at end of day

INDIVIDUAL STOCKS

AAPL staged a huge upside reversal on the largest volume since the Nov 16th bottom.  The stock probably put in a short-term bottom, and by short-term I mean the next few days.  We could see lower prices, but this volatile trade is flushing out most of the nervous AAPL holders and in their place far more confident buyers are stepping in.  Anyone buying here isn’t going to be scared by a pullback here or there.  They are in this for a longer-term trade and willing to hold through some volatility in order to get the profits they expect once some sanity returns to this name.  It will be these new owners who bring stability and take supply off the market, clearing the way for a rebound higher.  This doesn’t happen all at once and we could still see some wild swings in coming days and weeks.

Stay safe

AM: Anticipating employment

By Jani Ziedins | Intraday Analysis

S&P500 daily @ 1:17 EST

MARKET BEHAVIOR

Seems we are in a holding pattern after yesterday’s whipsaw action and anticipating tomorrow’s employment numbers.  It is still early in the day and the markets could make a break one way or the other, but so far things are steady to slightly positive.

MARKET SENTIMENT

Is this the calm before the storm?  What will send us higher or drop us lower?  The impact of Sandy will be in this employment  survey as business and consumption on the east coast was interrupted.  But everyone already knows that, so rational expectations will be for a weaker number.  Of course if the market is predisposed to selling off, it could use that weak number to justify liquidating shares.

The interesting thing to watch is if the employment will be the catalyst to get this market moving again, either up or down.  The Employment Report will be long forgotten by late morning as traders refocus on political risk, but if employment kicks off a wave of buying or selling, it could last for a couple of days.

TRADING OPPORTUNITIES

Currently we are pushing back toward the 50dma.  Holding above that key psychological level would be bullish, but don’t buy the first break above the 50 and wait to see if the breakout fizzles and reverses again.  There is more profit potential by being early, but there is also significantly more risk and more often the risk/reward doesn’t pan out of the overly-agressive trader.

A market refreshes itself by either pulling back, or trading sideways.  We came a long way in a short time the last few weeks and one way to clear the path higher is pulling back to the 200dma, the other is churning here for a bit.  A couple of months ago we churned above 1400 for a month before making a 50 point surge in just over a week.  I’m bullish over the intermediate-term, but more cautious here.  This is a great place for a value investor with a 6+ month time horizon to buy in.  For a more nimble trader, wait for the market to make its next move because you might see modestly more attractive prices if the coming days.

It seems a lot of traders are adjusting their portfolios for non-fundamental reasons, namely tax motivated selling.  This selling could create a buying opportunity leading into next year as stock rebound from this artificial inflation of supply.  And beyond that, we could see this same money pumped back into the markets in the near future.  What was weakness becomes strength.

AAPL daily @ 1:18 EST

INDIVIDUAL STOCKS

AAPL is having a wild ride today.  It gapped lower at the open and traded as low as $518 before rebounding back to $550.  There is a truckload of emotion tied to this stock right now and many of the investors who had a set-it-and-forget-it mentality regarding AAPL are freaked out right now.  Their sure-thing doesn’t feel so sure anymore.  Anyone who bought in the last 10 months is sitting on a loss.  How can it be possible to lose money on the surest of sure things?   While there is a lot of talk about tax selling, the thing people are overlooking is there are hundreds of millions of shares underwater right now, many of those held by late-to-the-party retail investors.  This kind of flush out isn’t surprising and is clearing the deadwood.  I’m not an AAPL bull and don’t know how much more upside is left in this name, but I think this selloff is getting out of hand and is creating a buying opportunity.  Buying here is catching the kinife and that is rarely a good idea, but if someone was wiling to hold for 6-12 months, they will be rewarded by stepping in front of this un-fundamental selling.

Stay safe

PM: Much ado about nothing

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

MARKET BEHAVIOR

The market was all over the place Wednesday.  Broke below 1400 in early trade, popped above 1415 in afternoon trade, and ultimately closed near break-even   Today’s price action did a good job humiliating bears and bulls alike and the multiple head-fakes triggered the strongest volume we’ve seen in a while.

For all the excitement, we are still suck between 1400 and the 50dma and today’s move didn’t shed much clarity on where the market is headed next.

MARKET SENTIMENT

Bears were sucked in with an early selloff, but were squeezed out a couple of hours later as the market surged higher.  Bulls jumped all over this rebound, but were ultimately let down as the market soldoff into the close.  What does this mean?  The market is still emotionally charged and short-term traders are trying to jump ahead of the next move.  These aggressive and premature traders are the source of this volatility and the market probably needs to marginalize these traders before the market can reveal its true intentions.  A couple more wild days like today will convince many of these short-term traders to stay away for a while.  Once they are out of the picture, the market will make its next move.

TRADING OPPORTUNITIES

Today’s move chased out a lot of weaker hands on both sides and there is a strong possibility the next move outside the 1400 to 1415 range will signal the market’s near-term intentions.  Or it could be just another head fake intended to humiliate and demoralize all the traders trying to jump ahead of the market.  This whipsaw selloff very well could have refreshed the rally and made room for further upside progress, it could also be the last gasps of the rally before nosing over, or it could be the just the start of a volatile trading range.

On this blog I often talk about high-probability trades, but right now a valid and solid case could be made for a move in either direction.  Pessimism remains at elevated levels and most traders expect us to fly off the Fiscal Cliff, meaning it is already priced in.  But at the same time the market rallied on hope that the Fiscal Cliff wouldn’t be such a big deal and we have corrected very little since negotiations in DC started bogging down.  This is turning into one of those situations where the probabilities are fairly well-balanced, making it nothing more than a flip of a coin.  To make money we need to see more of an imbalance and extreme in sentiment and we just don’t have that here.  At times like these it is best just to sit on cash and wait for more information.  The biggest mistake most traders make is needing to be in the market nearly all the time.  If you don’t have an edge on the market, take a break and go fishing.

AAPL daily at end of day

INDIVIDUAL STOCKS

AAPL was pounded relentlessly today.  This is what happens when a stock is over-owned and someone yells fire.  AAPL closed down 6.4% on no news as investors climbed over each other trying to get to the exits.  Lets be clear, AAPL is not a GMCR or NFLX with an astronomical and unsustainable valuation based on outrageous growth expectations.  But AAPL does suffer from being one of the most owned stocks in the world and it has run short buyers.  Blame it on tax increases next year, Android, supply chain issues, or whatever else people are talking about.    But the truth is everyone who wants some AAPL already has some AAPL and there is no one left to buy shares from the guy who wants to cash in.  It is anyone’s guess how far this selloff will go, but unlike other bubble stocks, AAPL is the real deal and it isn’t about to implode in on itself.  If anything, the street is under appreciating its growth, cash flows, and profit margins.  We might see a double bottom form, but recognize over the near-term this stock has transitioned from investment grade to trading material.  Expect the stock to remain volatile until we have concrete fundamental data out of the company, most likely the Q4 earnings.  Until then trading AAPL will just be legalized gambling.

Stay safe

AM: 1400 bounce

By Jani Ziedins | Intraday Analysis

S&P500 daily at 12:57 EST

AM Update

Markets tried to selloff and no doubt hungry bears piled on the early weakness.  But just as quick, the market bounced off 1400 and sent late bears running for cover.  Did this rally correct enough to refresh itself and is resuming the uptrend, or was this simply a false bottom on our way lower?

MARKET BEHAVIOR

Wild early trade.  Markets opened higher, then slid through he first couple hours before bouncing off the 1400 level and jumping back to new highs.  AAPL was pounded and no doubt contributed to the index’s early weakness.  The market flirted with 1400, a level that provided support multiple times going all the way back to August, before surging back above 1410.  Is this another legitimate bounce off 1400, or just a fake rally to suck in premature bottom-pickers and flush out aggressive shorts?

MARKET SENTIMENT

Last week everything was looking up and now everything is falling apart.  It is maddening how the market switches personalities like this, unless you understand how the market works and then these swings become profit opportunities.  As anyone who has been reading this blog for a while knows, we try to get ahead of these moves, not whipped around by them.

Everyone gets to contribute their ideas about what the market does, and they do this by buying or selling stocks.  But unlike the traditional one-person one-vote, in the markets some people’s opinions count a lot more due to the size of their trading account.  But the interesting thing about voting in the stock market, once you place your vote, you no longer have a say and are just along for the ride until you buy or sell more shares.  It is this ‘along for the ride’ period where interesting things happen.

This phenomenon was on display the last few weeks.  The markets sold off hard after Obama’s reelection as a mass of disappointed Republicans voted with their money and pulled out of the market in droves.  But after a certain point all these disappointed Republicans sold and they were no longer influencing the market’s direction.  At this point other investors saw an opportunity to buy heavily discounted shares on the heels of an emotional selloff.  These new buyers poured money into stocks, but after a couple of weeks they also ran out of money and after all the buyers bought, demand dries up and markets fall under their own weight.

While it seems like the market is changing personalities, it is simply reflecting the opinions of the traders actively buying or selling at that moment in time.  Recognizing what actually makes the markets move brings you one step closer to figuring out how to win at this game.

TRADING OPPORTUNITIES

Selling has modest to this point and we’ll most likely continue lower until we drop where it rattles some of the more confident traders.  But expect the market to saw tooth its way lower as bottom pickers and late shorts create these rallies.

Of course the market can go either direction and regaining and holding above the 50dma would signal this rally is back on.  We have the November employment report this Friday and that might be the catalyst to nudge the market one direction of the other.  Since we have rallied strongly the last couple weeks, expect and upside move to be more limited than a move lower that still has lots of room to run.

Stay safe

PM: Modest selloff so far

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

Markets down for a second day, but panic has not hit the street yet.

MARKET BEHAVIOR

Stocks finished in the red, but off of the day’s low.  We fell back under the 1410 level that was temporarily providing support.  Volume was up from Monday, but still below average.   We declined the last two days, but it has been anything but a mad rush for the exits as volatility and volume are well under control…..so far.

MARKET SENTIMENT

Buyers failed to show up for a second day.  Volume was lower than average, showing selling wasn’t the sources of the weakness.   Buying pushed this market higher, but now the rally is struggling to find new buyers willing to commit fresh capital at these levels and as a result we hit this soft patch.

Last week everyone was hoping for an early compromise to the Fiscal Cliff, but that view has changed 180 degrees and now it seems everyone expects us to blow past the deadline without an agreement.  I’m getting tired of always talking about the Fiscal Cliff, but it is the topic of the moment.  The overall impact will be minimal, but the market is obsessing over it and that creates tradable opportunities due to these overreactions.

Depending on how things go over the next couple weeks, the act of falling off the cliff could actually be the point of maximum pessimism and become the buyable catalyst. We’ll have to keep an eye on sentiment and see how other traders are positioned the closer we get to the deadline.

AAPL daily at end of day

TRADING OPPORTUNITIES

No reason to buy the dip here and most likely any strength is a good shorting opportunity.  Longer-term holders prepare mentally for a modest selloff and don’t let all the hype in the media scare you out of your positions.

INDIVIDUAL STOCKS

AAPL really took it on the chin today and it is getting harder to find an AAPL bull.  The selloff and this shift in sentiment is dramatically lowering the expectations for the company on what should be a blowout quarter.  IPhone5 is still on backorder, we have the iPad mini, the new iPad4, and the refreshed iMacs to make for a strong bump in Q4 sales.  This doesn’t mean AAPL can’t go down more, but AAPL at $575 is far less risky than owning it at $700.

Stay safe

AM: Weakness persists

By Jani Ziedins | Intraday Analysis

S&P500 daily @ 1:10 EST

The market is running out of buyers prices are softening.  Some will blame this or that, but the truth is a change supply and demand is the driver behind this weakness.  Look for a potential sawtooth selloff to at least the 200dma.

MARKET BEHAVIOR

Stocks tried to stage a rally in the first hour of trade, but quickly fizzled and we are currently down 0.3%.  Yesterday’s reversal had a large intraday range, but it happened on low volume.  From this we can infer it wasn’t a wave of selling that hit the market, but a lack of buying.  This further reinforces the notion this rally is running out of buyers.  If prices continue declining, we will naturally expect volume to pick up.  It will be this burst of volume on downside that signals the end of the pullback as the last surge of the sellers rush for the exits.  At that point selling dries up and we head higher due to a lack of supply.  The market is one a giant pendulum that swings back and forth.    It seems we are starting to swing back the other way.

There are a lot of people who claim it is foolish to time the markets.  What they really mean to say is most people, pros and amateurs alike, cannot time the market.  But that is simply because they are looking at the wrong clues.  The market is pretty straight forward if you understand the dynamics that cause prices to rise and fall.  Namely the emotions and positioning of other traders.

MARKET SENTIMENT

Over the last couple weeks the market’s rebound seduced many traders into thinking the Fiscal Cliff didn’t matter any more.  Anyone who was shouting doom and gloom was humbled by the recent rally and it encouraged anyone who expect the Fiscal Cliff to be resolved to jump in head first.  But the market doesn’t like being easy or predictable, so just as everyone thinks they have it figured out, the market throws a wrench into the works to keep everyone off-balance.

The biggest question we need answered is if this is the start of a real pullback, or just the last short-squeeze.  It is super easy to figure out what the market will do next, the challenge is knowing when it will do it.  Timing is where all the money is made.  Without a doubt the market will pullback because it always does, what we need to figure out is when it will happen.

TRADING OPPORTUNITIES

Breaking the 50dma yesterday and squeezing out the last of the bears really puts the odds in favor of this being the real pullback.  But don’t mistake favorable odds with certainty.  There are no guarantees in the market and the chances of this being the real pullback are about 2/3 to 1/3.  So while it makes the pullback more likely than not, out of three similar setups, one will continue higher.  But as a trader that is okay.  The goal isn’t to always be right, but to make more money when we are right than we lose when we are wrong.  We use risk management techniques like limiting losses and letting winners ride.  We also look for setups that put the probabilities in our favor.  Combining these techniques vastly improves the chances we will be successful, but there are no guarantees in this game.

I think this is the real pullback, but there is a smaller probability there could be last short-squeeze before this rally leg is done.  Most likely we will see a sawtooth lower as  bottom-pickers get sucked in prematurely on the way down.  The rule of three works pretty well in these situations.  This is where we get two or three head-fakes before the real reversal happens.  There is a lot of psychology behind why this happens, but just know that every short-squeeze or false bottom brings us one step closer to the one that actually sticks.  Ignore the first couple, but get ready to trade the 3rd or 4th.  We had several short squeezes over the last couple weeks and that is why I am more confident in this attempted pullback.  And on the other side we’ll see a few failed rally attempts before the real one can succeed.

INDIVIDUAL STOCKS

AAPL outperformed yesterday and is getting whacked today.  There are opinions abound about AAPL from it being the first trillion-dollar company to it falling 70%.  And you know what, both could be right.  AAPL’s rally could still have legs if international sales continue exploding.  While AAPL’s products are premium priced, the number of people around the world who can afford it are growing every day.  It is highly unlikely AAPL will lead the budget handset market, but with the exploding global middle class the pie is growing so fast AAPL will do just fine focusing on the upper end of the market.  But at the same time technology companies rarely dominate for long.  Palm and Rim are recent examples of 800lb gorillas  being supplanted by a newer innovator.  Ten years from now Apple will still be a big player, but it won’t have the coolest or most innovative producer on the market.  It is fine to trade AAPL, but I wouldn’t plan on handing shares down to your heirs.  Hardware is just too volatile for any one company to stay at the top of the hill for more than a couple iterations.

Stay safe

PM: Too-far, too-fast

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

Is the market finally running out of buyers?

MARKET BEHAVIOR

The market’s character is changing slightly as we saw the biggest intraday selloff in a month.  Today was an outside reversal, meaning the high was higher and low was lower than the prior day.  The market opened above the 50dma, but those were the highest levels of the day and the market sold off through the close.  There were a few failed rally attempts, but each only temporarily halted the selling.

This breaks the pattern of intraday bounce backs after early selloffs.  We will see if tomorrow can find support, or if this too-far, too-fast rally has finally reached the breaking point.

MARKET SENTIMENT

It will be interesting to see how Tuesday trades.  Today’s price action was fairly negative and that could cause many would-be buyers to take a wait and see attitude.  Few are going to buy tomorrow if they think they can get a better price in a few days.  Without a demand from a pool of buyers, prices will fall to the point where buyers are finally tempted to come back.

After today’s selloff, the ball is in the value investor’s court.  We will fall until they see prices they can’t resist.  We could see them stepping in tomorrow if they expect an imminent resolution to the Fiscal Cliff, or they could wait for us to bounce off the 200dma.  They could even wait for us to penetrate the 200dma before stepping in in meaningful numbers.

And lets not forget most of the bears were chased out of the market the last couple weeks and they are ready to pile on any weakness, further pressuring a weak market.

TRADING OPPORTUNITIES

There is no such thing as a safe trade in the stock market, but there are situations more favorable than others.  It is these high probability trades that give the savvy trader an edge over the long-term.  It looks like we are on the verge of one of those opportunities.  No doubt this could turn into another short-squeeze, but I think the market has risen far enough to flush out the vast majority of shorts, meaning there is not a lot of shorts left to squeeze.  We’ve also consumed most of the demand from buyers willing to chase this rally higher.  There are no guarantees here, but it seems like the odds favor a pullback to at least the 200dma.

Of course this is for the more nimble swing trader.  Anyone with a longer view of the market should continue holding.  Just be aware of the imminent pullback and prepare mentally for some near-term weakness.  As most people cognitively recognize, we’ll resolve the Fiscal Cliff at some point, but the market could get emotional as the negotiations get ugly.

INDIVIDUAL STOCKS

AAPL’s daily price action mirrored the indexes day-long slide, but it finished in the green by a fraction of a percent, outperforming the broad market’s half-percent decline.

There is a lot of talk of people selling their big winners ahead of an imminent tax policy change, but never ever let taxes influence your trading decisions.  The market moves way too much for any tax savings to be worthwhile because they can be wiped out in a matter of days.  Long-term capital gains, short-term capital gains, dividends at ordinary income rates, wash sale rules, etc, it doesn’t matter, trade the stock market. If you thought AAPL had a good run over the last 10 months, but chose to hold for two more just to get long-term capital gains treatment, how did that work out for you?

Anyway, all the people who are listening to their accountant and selling gains this year are creating weakness in good stocks.  Their loss can be your gain.

And of course all these recently liquidated trading profits (and special dividends) are going to need a home next year.  That buying could put prices higher in the first half of next year.  Remember, only supply and demand directly determines prices, not fundamentals.  If all these traders are buying back into the market after their tax sales, it will support the market no matter what else is going on in the world.

Stay safe

AM: Markets struggling for direction

By Jani Ziedins | Intraday Analysis

S&P500 daily @ 1:14 EST

AM Update

MARKET BEHAVIOR

Markets opened above the 50dma and almost instantly began selling off.  Could this be the last short-squeeze before pulling-back and digesting some of the recent run up?  It is still early in the day and we need to watch if the market rebounds this afternoon like it has with other recent intra-day declines.  If we fail to get that bounce, we might be seeing the market shift character and a change its near-term trend.

MARKET SENTIMENT

Everyone knows the kind of rally we’ve seen since the bottom on Nov 16th can’t keep going up indefinitely.  But what they know rationally doesn’t always connect with what they feel when looking at their trading screens.  We had several categories of traders in the recent move:

• The first were the fearful trader who sold out on the slide and is looking at this rebound with deep regret.
• Next are the fearful traders who were paralyzed during the decline and through inaction inadvertently held through the dip.  He is felling pretty good about himself right now.
• There is the opportunist who felt the selloff was overdone and bought the dip and is beating his chest with pride.  Some of these dip buyers sold for a quick profit, but many are feeling cocky and still holding for more gains (greed).
• We also have the bear contingent that have waited for this market to break wide-open and have piled on the shorts every chance they get.  They were on top of the world a couple of weeks ago, but are now bloodied and battered 4+ short-squeezes later.
• And the last group is the value investor that has a longer-view and holds through good times and bad.

Where we go from here largely depends on what the aggregate of the above groups does next.

• Prudent risk management has forced most shorts out of the market as we relentlessly marched above one key technical level after another.  At this point most of their buying is done, but this also means they have fresh resources to re-short the market if new weakness develops.
• Regretful sellers of the Obama dip are sitting on their hands afraid to act.  They are rationalizing that selling two weeks ago was right thing because the market really is going to breakdown…….eventually.  While most of these guys can’t put any additional selling pressure on the market because they are already out, they won’t support the current rally with their buying either.  Eventually they will come around and provide fuel for a future rally, but it takes time for them to regain their confidence and for fear of losing money to be replaced by fear of being left behind.
• Indecisive owners who held through the dip are likely to have flashbacks if prices start falling and they could easily get shaken out this time around.
• And the last group of value investors are cool, calm, and collected, but they are also reluctant to buy stocks after a run-up and instead prefer to let prices come back down on what they view as the inevitable pullback.

So what does all the above mean?  It means we are running out of new buyers and a fresh wave of sellers could show up if prices start pulling back.  The financial press always tries to find a fundamental reason stocks moved one way or the other, but the truth is prices only move to balance supply and demand.  Now sometimes unexpected news will affect expectations and in turn skew the balance of supply and demand, but often in  medium timeframes supply and demand will move the market by itself independent of the news around it.  For example stocks will often sell off when everyone is most optimistic on a stock because at that point everyone who wants some already has some and without any new buyers waiting in the wings, demand dries up and the price declines.  The opposite has happened here.  Fiscal Cliff talks have grown further apart over the last two weeks, but the market has rallied in the face of these negative developments.

TRADING OPPORTUNITIES

If there was a time to lock in profits, now is looking pretty good.  If the break above the 50dma doesn’t stick, this would also be a place for aggressive and experienced traders to look at shorting the market.  But if we continue holding these levels for a few days, that shows buying hasn’t climaxed and there is still upside left in this move.  If that is the case, I don’t think owning the market here makes for a good risk/reward because there is only so much higher this steep rally can go, but for shorts it would be a prudent to cut bait and wait for the next entry.

INDIVIDUAL STOCKS

AAPL is still in the green, but off of early highs like the rest of the market.  All of the above commentary applies to AAPL as a stock too.

Stay safe

LA: 1 of 3

By Jani Ziedins | Intraday Analysis

Look Ahead

I’m adding weekend posts designed to take a wider view of the markets and filter out much of the daily noise.  These Look Ahead posts will focus on what we could see in the coming week and how to respond and trade those possible outcomes.

MARKET BEHAVIOR

As we covered in the last post, the weekly charts show the recent selloff is not much more than a standard 200dma correction at this stage, far from a major selloff that some feared.  Larger selloffs and bear markets tend to grind lower so slowly that people hardly notice the small leak in their portfolio.  The last few weeks were anything but a stealth move and what goes down quickly finds a bottom quickly.  While we might not have seen the lows of this move, we certainty found an intermediate bottom and recaptured nearly all the emotion fueled Obama reelection selloff.

MARKET SENTIMENT

We are entering the holiday zone between Thanks Giving and Christmas.  Trade will be lighter than average, but with the markets up nearly 13% there will be pressure on some portfolio managers to catch up to their benchmarks by yearend.  At the same time you might see other managers that are ahead sit on their profit cushion and coast into yearend.

We regained most of the Obama selloff and the market showed once again that emotional trading is the quickest way to give away money.  Many of these traders would have been better off-putting a pile of money in their driveway and lighting it on fire.  That would have been far more efficient and spared them the emotional torment of being on the wrong side of the market.  But that trade is now ancient history, so lets focus on what is in front of us.

The market is at a decisive turning point.  The market can prove its strength and march right through the 50dma in defiance of all the headline risk domestically and internationally.  This scenario is not unreasonable given the fair amount of pessimism currently priced into the markets and the recent selloff that flushed out weak holders and replaced them with opportunistic value investors who are far more patient and willing to sit through volatility.

The next scenario is the market breaks the 50dma and passing this key level triggers autopilot breakout buying from managers who don’t want to be left behind and stop-loss buying from bears managing their risk.  Key technical levels attract clusters of buy and sell orders, often creating a self-fulfilling prophecy, at least temporarily.  The big test will be watching for follow on buying after the short-squeeze.  If buyers fail to show up at the higher valuations, demand will dry up and we’ll reverse fairly quickly.

And the last scenario is where buying dries up before we even have a chance to touch all the buy orders sitting above the 50dma.  We could simply run out of buyers after all of last weeks buying, or the rhetoric in Washington reaches such a level that buyers get nervous and step away.

TRADING OPPORTUNITIES

I’ll take these in reverse order.  The selloff scenario is pretty straightforward.  If the market sells off and fails to bounce back immediately like we’ve seen in recent weeks, expect it to continue lower and retest the 200dma, likely breaking through it before finding footing.

A short squeeze above the 50dma will fail quickly and present an even better opportunity to short the market.  Wait a few days and let the market prove itself before buying the breakout.

And lastly, a sustainable break above the 50dma will hold above this level for several days, at which point we can assume real buying is propping up prices at these levels and we can tentatively venture in on the long side.

Honestly I would be surprised if we didn’t see some volatility before this consolidation is resolved.  But this is a good thing; volatility is how traders make their money.  Don’t complain about the markets indecisiveness and irrationality, profit from it.

Take a wait and see approach Monday morning and watch for which of the three above scenarios starts playing out.  Maybe it will happen Monday morning, or maybe we’ll trade sideways for a few days.  But there will be a resolution to this test of the 50dma and we need to be ready to trade it proactively.

INDIVIDUAL STOCKS

Expect AAPL to struggle with the 200dma unless the broad market decisively breaks through the 50dma.  A double bottom is still on the table, or alternately the stock could just churn sideways.  At this point it needs a catalyst to regain the $700 level.  Maybe that is a great quarterly report, a highly compelling AppleTV, or some other new and must have device.  The holiday season will be important for AAPL and it could blow away estimates since most of its products were refreshed last month and that will lead to larger than normal upgrade wave this quarter.

Stay safe

WR: Rally back on?

By Jani Ziedins | Intraday Analysis

S&P500 weekly

Weekly Review

It helps to take a step back and look at longer-term charts to see what the market is really up to.  Paying too much attention to the daily noise can be confusing and misleading.  Weekly charts and analysis average out the noise and give a far more clear view of what is going on.

MARKET BEHAVIOR

Markets closed in the green for the second week in a row.  We finished the week up 0.5% on higher volume than the previous week, no doubt helped in part by end of month window-dressing.  While the last few weeks felt dramatic between the post-election selloff and the subsequent rebound, the longer-term charts make it look like a fairly benign pullback to the 200dma.

MARKET SENTIMENT

If this pullback is anything like what we saw this summer, we can expect some daily volatility, but the weekly chart will resume the up-trend.  And this makes a lot of sense if we filter-out all the noise and rationally think about where the market and economy are headed next year.

Discounting the Fiscal Cliff, Euro-Mess, and China, we are left with a slow but stable economic recovery plus corporate profits and balance-sheets that are as good as they have ever been.  Year-over-year numbers are not as eye-popping as they were simply because we are running against tougher comps.  The only reason 2010 and 2011 looked so strong is because the prior years were downright horrible.

The driving force behind this counterintuitive corporate strength is the massive streamlining and cutbacks made during the recession.  Cutting the excess made companies leaner and meaner than they were in boom times, giving them profit margins not seen a couple of years ago.

Looking forward six-months, we have an economy that is still healing and a stock market that is nervous.  That is the exact recipe for a bull market.  We need to doubters for prices to appreciate because when everyone agrees things are great is when we run out of buyers and the market tops.

TRADING OPPORTUNITIES

While we might experience some near-term volatility , the long-term prognosis for the economy and markets is great.  There is so much widespread fear of the stock market that we are likely on the verge of a 15 year bull-market.  Something we’ve seen every time in market history after a decade of stagnant stock prices.  When everyone is pronouncing buy-and-hold is dead is the best time to buy-and-hold.

INDIVIDUAL STOCKS

AAPL is bouncing back from its recent selloff and challenging the 200dma.  Given that AAPL nearly doubled in the twelve months leading up to the September high, a 20% pullback is normal, expected, and healthy.  I have no idea if AAPL can keep up the pace of innovation over the next ten years or not, but it has barely tapped the potential global market for smart phones as the world’s middle class explodes.  Given the huge market opportunity, high profit margins, and very reasonable valuation, there is no reason to expect AAPL will collapse like a bubble stock.

S&P500 daily

SCORECARD

October 18th, 2012  “Start looking for longs to lock in profits on and watch for weakness to short.  Don’t get in front of this steamroller by trying to pick a top, but if weakness forms, jump on the short and ride it through the 50dma.”

Stay safe

PM: Fiscal Cliff worries behind us?

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

PM Update

Stocks were flat on the last trading day of the month.  The 50dma is providing overhead resistance and breaking through this level should be met with skepticism.  We’ve come a long way and it wouldn’t be surprising to see the market pullback some.

MARKET BEHAVIOR

Stocks entered a holding pattern on the last day of the month.  We ended virtually unchanged on higher volume as portfolio managers adjusted their positions for month-end.  The last 10-minutes provided some excitement as the market surged higher, trying to breakout, only to give back most of those gains in the final 5-minutes.  Portfolio managers and index funds make their trades in the final minutes of the day and their jockeying made for those last-minute fireworks.

MARKET SENTIMENT

Technically we are still under the 50dma and it is providing overhead resistance.  The 50dma is a widely followed technical indicator and breaking through could trigger a wave of short-covering and breakout buying since many traders follow the same technical trading philosophy.  But given how far we’ve come, I would be suspicious of any breakout rally and recommend waiting  a couple of days to confirm it is the real thing.

Sentiment wise it seems like a lot of the fear of the Fiscal Cliff has evaporated.  A couple of weeks ago the market was selling off as politicians extended olive branches to each other, and now we are rallying as they use press conferences to throw barbs at each other.  A bit odd if you ask me, but that is standard operating procedure for the markets.

The market often looks ahead six months or more and could have already discounted the Fiscal Cliff .  Or the market could be sucking in the last of the momentum buyers before the rally fizzles and reverses lower.  While most of the market might cognitively acknowledge the Fiscal Cliff will eventually be resolved, the fear of the unknown can overpower rational thought and herd instinct compounds these impulses.  As humans we fear risk about 2.5 times more than a similar reward and this is why the stock market sells first and asks questions later.

TRADING OPPORTUNITIES

Are we on the verge of something like we saw in the summer of 2010 and again this summer?  I don’t think so because those two cases started from a level of high complacency after big rallies.  We have sold off since September and sentiment is already fairly low.  The market could get spooked by a bad headline out of Washington, but it should find a floor fairly quickly.  We could easily break the 200dma again and even challenge the recent 1343 low.  But don’t count on going lower than that.

Another scenario is pessimism is already elevated and the Fiscal Cliff worries over the last couple weeks scared off all the emotional traders, meaning there are very few sellers left to spook out of the market.  In that case we could continue rallying into the end of the year.

The easy trade is if market plunges on Monday.  The harder read is if we pop above the 50dma.  That could be the last gasp of this rally, or it could be a continuation move and  the rally resumes.  Short-squeezes are very short-lived phenomena and within a couple of days we’ll know if a break above the 50dma is going to stick.  If it can’t hold, expect a selloff through the 200dma.  If the breakout sticks, the market doesn’t want to sell off and the smart trade is buying and holding on.

INDIVIDUAL STOCKS

Surprisingly AAPL was left out of the broad markets recovery today and it finished off 0.7%.  Under normal circumstances this would be a red flag, but we might give AAPL the benefit of the doubt today simply because it is the most widely held stock and month-end window-dressing could be part of today’s weakness.  AAPL has rallied a good ways from the November 16th low and broad market weakness could push the stock down again.  Hold off buying AAPL for the time being because you might get a better opportunity over the next couple weeks.

How did I do?

SCORECARD

Looking back at recent calls from CrackedMarket:

November 26th, 2012  “The trend is lower and the trend is more likely to continue than reverse, so we should plan for further weakness.  But at the same time, bears are getting pretty aggressive and we might see a short-squeeze thrown in before heading lower just to keep things entertaining.  The market doesn’t like to be predictable and a short-squeeze before plunging lower would zing both sides and humiliate everyone equally.

At this point I am looking for a plunge lower on gigantic volume to signal this correction is bottoming.  I would be reluctant to buy a rebound from this level without a huge selloff.  Lacking that, the rally won’t have the ammunition and sentiment necessary to sustain a move higher.  The market rises on fear and we need to scare everyone to get this rally going.  The only exception I would consider is if the market traded strong for four or more days.  I could get on board with that kind of strength, but that rally wouldn’t have the same upside potential as a market that had a decisive shakeout.”

Stay safe

AM: Looking for direction

By Jani Ziedins | Intraday Analysis

S&P500 daily @ 12:36 EST

Markets trading sideways today as the market is looking for direction.  The recent rally used up a lot of the bull’s ammunition and we should be on the lookout for reinvigorated bears to take back some of those gains.

MARKET BEHAVIOR

Stocks are trading modestly lower this morning.  There is not any big new and the market is digesting recent gains.

MARKET SENTIMENT

We’ve come a long way from the panic driven selloff to 1350 where everyone expected the world to implode between Obama’s reelection and the impending Fiscal Plunge.  In a couple weeks we went from the world ending to everything is going to work itself out just fine.  Funny how bipolar the markets can be.  While most people are frustrated with this behavior, the savvy trader exploits these emotions for quick profits.

Right now the market is approaching complacency, anticipating the two parties will work this deal out.  It is also assuming a plunge off the Fiscal Cliff might not be such a scary thing because the ‘Cliff’ really is a gentle bunny-hill that takes a full year to fall down.  The thinking is that even if we fall off the cliff, there will be plenty of time to continue negotiations and retroactively unwind the any tax and spending implications.

And while that analysis is spot on, it assumes the market will be perfectly rational when the financial press starts screaming we are about to fall off the cliff.  What we have here isn’t a serious structural problem, but a one of irrational fear.  And that is exactly what I am hoping for.  It is impossible to consistently make money off of a rational and efficient market, we need emotional market cracks to exploit and the a breakdown in talks between Democrats and Republicans will do that.

Last week the two parties were open to compromise, but that was an unspecified compromise.  Now that both sides are getting into actual numbers, they are realizing just how far apart they really are and neither side is willing to compromise enough to meet the other side.  It will happen eventually, I have no doubt about that, but each side is going to follow the negotiation handbook first and that includes making unreasonable demands and walking away.  We are on the verge of this unreasonable demands and walking away part and that will no doubt spook the market, letting the air out of this optimistic rally.

TRADING OPPORTUNITIES

It is a given these negotiations will blow up at some point, the question is when.  Will it be this weekend?  Will it be closer to the deadline?  Or are both sides so sensitive and considerate of the stock market that they will work together and push through a deal without all the bickering.  Ha, ya right!

There is some sizable downside risk in the near-term for the trader, but for the investor this will just  be a blip it should be easy to hold through.

The experienced and savvy trader can look for a good shorting entry point.  There is risk of one more short squeeze if we push through the 50dma on more conciliatory talks out of Washington.  On the other side there is the profit potential of a 30+ point slide lower as talks breakdown. At this point it is up to the individual trader to decide how much risk they are willing to accept and if they want to get in early or take the safer route and get in a little late.

For the investor, get your wish-list out and wait for the inevitable breakdown and let prices fall to more attractive levels.

INDIVIDUAL STOCKS

Everyone’s favorite AAPL is feeling the broad market’s weakness but at a rate 3.5x the market, down 0.7% to the markets 0.2%.  AAPL is surprisingly volatile for the most valuable company in the world.  Given the high-beta trade of AAPL, it no longer makes for a safe-haven in turbulent markets and wary investors should look for other places to hide their cash.  But beta cuts both ways and AAPL will be an attractive buy when the market bounces back.

How did I do?

SCORECARD

Looking back at past ideas and commentary from CrackedMarket:

November 1st, 2012  “Last week I mentioned the best way to humiliate everyone would be to trigger a short-squeeze before turning lower and falling under 1400.  We are halfway there with today’s short-squeeze.”

Stay safe

PM: Buy or sell the breakout?

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

Markets notched a new high for the rally as we approached the 50dma.  Bears are becoming an endangered species as the bulls continue running them off.  But one of the more powerful paradoxes in the markets is the smaller a group gets, the stronger they become.  Expect the remaining bears to make themselves herd in coming days.

MARKET BEHAVIOR

The market finally cleared 1410 and rose to the 50dma before settling back to 1415.  Volume was average and the masses were not rushing to buy this breakout.

Boehner caused a dip in early trade during a press conference when he said the sides were not close to a deal.    Stocks have come a long way in a couple of weeks as optimism of an imminent deal boiled over, but is this time for the pendulum of sentiment to swing back the other way?

MARKET SENTIMENT

Stocks have been rallying nonstop regardless of the news.  Bad news might cause stocks to sell off momentarily, but within an hour they rally back.  That’s what happened with Reed’s comments a couple of days ago and Boehner’s comments today.  This is a Teflon market as it shakes off anything and everything.  Does that make it a safe time to buy, or is the perceived safety making it even more dangerous?

Bears have gotten chased out for the umpteenth time and are starting to get discouraged.  Markets will often feign a reversal a couple of times before actually going through with it.  Given the recent whipsaws, we are getting close to that real reversal.  Many of the buyers have bought and most of the shorts have been squeezed out.  Without a new catalyst, we will run out of buyers shortly.  There might be enough gas in the tank for one push higher through the 50dma, but don’t expect our politicians to pretend to get along for much longer.

TRADING OPPORTUNITIES

Maybe we’ll poke our head above the 50dma tomorrow, or maybe we’ll finally breakdown.  There has been a lot of hope built in to this rally that the Fiscal Cliff will be resolved early.  But this is nothing more than wishful thinking, as anyone who regularly follows national politics will tell you.  These negotiations will get far worse before they get better and the rhetoric will only get louder as both sides try to court public opinion.

This is a good time to lighten up on stocks because not much upside remains without a definitive Fiscal Cliff deal.  At the same time there is plenty of downside risk if talks breakdown.  Friday might be a good day to try out a short because the weekend will give extra time for some politician to stick his foot in his mouth and wreck the fragile hope something constructive will come out of Washington.

INDIVIDUAL STOCKS

AAPL is riding along on the Fiscal Cliff rollercoaster like everything else in the market, albeit with a little more beta.  There is hope AAPL will declare a special dividend because of the impending tax changes, but I wouldn’t hold my breath on that one.

How did I do?

SCORECARD

This segment recaps past blog posts to see how I did.

November 5^th, 2012 “Given the pervasive hope for a Romney win, especially among retail traders bamboozled by the media, creates an opportunity for a trade.  We could easily see a selloff after an Obama reelection if emotional traders dump shares due to an irrational expectation Obama will wreck this country.  That selling will climax quickly and create a great entry point for the trader who understands politics, how the markets work, and supply and demand.  Within a couple of days everyone who wants to pull their money out of equities because of Obama’s win will have done so, meaning all the sellers have sold.  At that point supply dries up and the market rallies.”

Stay safe