Mar 17

LA: Time to cash in?

By Jani Ziedins | Weekly Analysis

S&P500 weekly at end of week

S&P500 weekly at end of week

Look Ahead

MARKET BEHAVIOR

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

MARKET SENTIMENT

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

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

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

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

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

TRADING OPPORTUNITIES

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

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

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

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

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

Stay safe

Mar 16

WR: How safe is this market?

By Jani Ziedins | Weekly Analysis

S&P500 weekly at end of week

S&P500 weekly at end of week

Weekly Review

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

MARKET BEHAVIOR

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

MARKET SENTIMENT

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

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

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

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

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

TRADING OPPORTUNITIES

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

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

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

AAPL weekly at end of week

AAPL weekly at end of week

INDIVIDUAL STOCKS

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

Stay safe

Mar 15

PM: Embrace or shun this market?

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

S&P500 daily at end of day

PM Update

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

MARKET BEHAVIOR

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

MARKET SENTIMENT

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

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

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

TRADING OPPORTUNITIES

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

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

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

INDIVIDUAL STOCKS

AAPL daily at end of day

AAPL daily at end of day

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

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

Stay safe

Mar 15

AM: Where are the buyers

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:56 EDT

S&P500 daily at 1:56 EDT

AM Update

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

MARKET BEHAVIOR

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

MARKET SENTIMENT

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

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

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

TRADING OPPORTUNITIES

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

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

INDIVIDUAL STOCKS

AAPL daily at 1:57 EDT

AAPL daily at 1:57 EDT

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

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

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

Stay safe

Mar 14

PM: Two-points shy

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

S&P500 daily at end of day

PM Update

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

MARKET BEHAVIOR

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

MARKET SENTIMENT

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

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

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

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

TRADING OPPORTUNITIES

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

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

 

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

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

INDIVIDUAL STOCKS

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

Stay safe

Mar 14

AM: All-time highs within reach

By Jani Ziedins | Intraday Analysis

S&P500 daily at 12:52 EDT

S&P500 daily at 12:52 EDT

AM Update

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

MARKET BEHAVIOR

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

MARKET SENTIMENT

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

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

TRADING OPPORTUNITIES

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

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

INDIVIDUAL STOCKS

AMZN daily at 12:53 EDT

AMZN daily at 12:53 EDT

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

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

Stay safe

Mar 13

PM: More left in the tank?

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

S&P500 daily at end of day

PM Update

Stocks continue finding support, suggesting further upside.  AAPL still cannot get out of its own way and high-flyers keep flying higher.

MARKET BEHAVIOR

Stocks closed above 1550 for the 4th consecutive day and are building support for a potential continuation.  Volume was extremely light for the third-day as few are looking to buy, but even fewer are trying to sell.

MARKET SENTIMENT

Tops from unsustainable levels rollover fairly quickly.  The surge of buying pushes the price beyond what is reasonable and as soon as the euphoric demand exhausts itself, the market quickly reverses.  Present strength and support suggests there is upside left in this move.  If buying really was exhausting itself, we could not continue holding these levels.

This is a departure from what I’ve been talking about the last few days.  While the analysis showing this market is getting close to a top is still valid, recent price actions shows it is premature.  Market go further and longer than anyone expects and that seems to be the case here.  Picking tops is tricky business and there is no reliable way to do it.    The only thing we are left to decide is if we want to sell into strength on the way up, or wait for weakness and get out on the way down.   My style is selling early, but that is personal preference and everyone needs to figure out what works best for their personality and trading style.

TRADING OPPORTUNITIES

Expected Outcome:
We have to decide how much profit we need to be successful traders.  The market rose 3.3% the last two-weeks.  100% leverage doubles that return to 6.6%.  No one is going to get rich off of 6%, but what if we set a goal of capturing gains like this several times a year?    Nab a high-probability trade every other month and that adds up to a 47% ROI.  Do it once a month and it compounds to 115%!

Many traders have a hard time selling into strength because they can’t let go of missed profits when they cash-in too early.  What if waiting for those extra profits is what is holding them back?   Many would scoff at trading 3% swings in the indexes, but there is real money to be made in it.  We all have to ask ourselves why we are doing this.  Is it so we can brag to our neighbor that we bought AAPL or PCLN before they did?  Or are we in this to make money?  If the goal is making money, I’ll take boring 3% moves in the index all day long.

It is likely this market will continue higher.  We traded above 1550 for the fourth day and if it was going to breakdown it would have happened already.  If we hold 1550 again tomorrow, it is buyable for another dozen ponts higher.  If we break under 1550, that is likely the end of this rally; markets can only bounce so many times and this one is nearing its quota.

Locking-in profits here is preferable, but if a person must trade, buy support and sell a breakdown.  Keep any upside gains on a short leash, especially if the breakout is sharp and on high volume.

Alternate Outcome:
This could be the half-way point in a six-month monster rally.  There is no real reason for this market to breakdown other than running out of buyers, but the stock market rally and bond slide could keep pushing new money into stocks as the herd chases performance.  I am cautious at these levels because it seems like fear of a pullback is diminishing, but I will continue looking for signals that this move still has legs.

INDIVIDUAL STOCKS

LNKD daily at end of day

LNKD daily at end of day

AAPL gave up a strong rebound to finish flat.  The stock rallied to $435, but hit its head sold off into the close.  What else is there to say but great company, lousy stock.  The inability to mount a meaningful rebound show the high probability trade remains lower.

AMZN, LNKD, and NFLX all added to their ridiculously obscene valuation.  The market often humiliates those that spend too much time thinking about what it should do and not enough trying to understand what it does.  There are very legitimate reasons why AMZN, LNKD, and NFLX continue higher while AAPL continues lower.  Understand what moves markets and the mystery vanishes.

Stay safe

Mar 13

AM: Buy, sell, or hold

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:30 EDT

S&P500 daily at 1:30 EDT

AM Update

Markets finding support, but are we close to the top?

MARKET BEHAVIOR

Stocks continue finding support around 1550.  We dipped modestly but bounced above break-even by late morning.

MARKET SENTIMENT

Retail sales came in higher than expected, showing the payroll tax and gas prices are not taking too much of a bite out of the economy, but the market responded with a yawn. That means either it was already priced in, there are few people left to buy the news, or the market simply doesn’t care about fundamentals right now.  Lets look at how these various explanations affect where we are headed.

Given the market’s recent rise, it isn’t surprising a fair amount of good news is already priced in.  The long rally also has a calming effect on the traders, helping them forget about their worries.  If traders feel pretty good about the state of the world, they are likely fully invested.  But if most are fully invested, who is left to buy good news?

Everything I see says this rally is running out of gas, but that doesn’t mean this is the top.  Momentum can easily carry us higher.  In addition, tops are often volatile and indecisive as buy-the-dip traders fight it out with top-pickers.  This back-and-forth can chew up a traders in no time if they react to each dip and bounce.

1565 is clearly in the market’s sights and it is a coin flip if we get there.  Buying after such a strong run is clearly late in the game and doesn’t provide a favorable risk/reward.  Shorting here is also a bit premature because the up-trend is still intact and it would be nothing more than a gambler’s game of picking-a-top.  While that can be fun, it usually isn’t profitable.  All of us are in this because we love the challenge of the markets, but we often forget we don’t always need to have a trade on.  In fact forcing a less than ideal trade is how smart investors often give up most of their hard-earned profit.

TRADING OPPORTUNITIES

Expected Outcome:
The market is entering an indecisive and volatile period as it bases and gets ready for its next move.  Markets often top fairly quickly, so holding 1550 for another day bodes well for the continuation.  Failing to close above 1550 on Thursday shows demand is struggling to keep up and the market will likely encounter a bout of selling.

The market could easily go either way, so it is hard to justify a trade here.  Wait for it to show its hand and then grab on.

Alternate Outcome:
These signs of topping can also count as resting.  We’ve come a long way and it makes sense for the market to slow down.  Sideways is often a way the market catches its breath before continuing higher.  But for the market to continue higher, it would be helpful to see more traders calling the top and following that talk up with selling and shorting the market. Seeing it hold up in the face of that wave of cynicism demonstrates it still has room to go.

The biggest challenge with subjective sentiment analysis is the risk of confirmation bias that skews a trader’s view of what ‘everyone’ is thinking.  As this market rallied, I kept hearing bears say how bullish everyone was.  But the interesting thing is I heard more bears talk about bullishness than I heard firsthand from bulls.  Obviously these bears had a preconceived bias and they sought out data that supported their existing views.  This is not all that different from buying a Honda and suddenly it seems like everyone is driving a Honda.  The number of Hondas didn’t change, just that you now notice them.  Bears focus on bullish opinions and bulls on bearish ones.  The hard part is seeing what is really there, not just what we want to see.

INDIVIDUAL STOCKS

The chop in AAPL continues.  Up one day, down the next.  The stock is mostly holding between $425 and $435 with occasional excursions a few dollars above or below.  Look for a breakout either way to have some legs because this is becoming a closely followed range.  A break above will trigger a wave of buying and a dip below will setoff selling.

NFLX daily at 1:30 EDT

NFLX daily at 1:30 EDT

The sideways trade shows the stock is not over-sold and primed for a sharp bounce, so anyone trading that thesis needs to reevaluate.  Chances are the breakout/breakdown will be short-lived and anyone trading that move should take profits early.

NFLX is launching off of support and putting the hurt on bears again.  Stocks that are too-high most often continue higher.  Trade the momentum, don’t fight it.  Arguing with the market is one of the surest ways to give money away.

Stay safe

Mar 12

PM: The streak ends

By Jani Ziedins | End of Day Analysis

S&P500 daily at end of day

S&P500 daily at end of day

PM Update

The streak ends, but it is too early to proclaim the rally is dead.  Another AAPL rumor comes and goes.

MARKET BEHAVIOR

Stocks made new highs in early trade, but couldn’t hold those gains and fell into the red by mid-morning.  From there the market chopped around, finishing near the midpoint between the daily high and low.  Volume was lower than average, but higher than Monday’s extremely light levels.

MARKET SENTIMENT

It was only time before the market ended its winning streak and we cannot read too much into today’s quarter percent decline.  The more interesting insight will come as the market responds to this selloff.  Was this just a pause on the way higher or the start of something more?  There are many signs the market is running out of buyers, most notably the lack of short-squeezes on strong employment or new highs yesterday and today.  Bears and cynics were a big part of the rally and it is a major shift in sentiment if they gave up fighting the rally.

 

TRADING OPPORTUNITIES

Expected Outcome:
There is not much to do here except wait for the market to reveal its intentions.  Spending a couple more days between 1550 and 1555 will demonstrate constructive support and lack of meaningful selling.  At that point we can grab on for a ride up to 1565 and 1575.  But if the market fails to hold 1550, a larger pullback is in store.  The first level of defense is 1530, then 1525, 1515, and finally 1500.

The easiest trade here is locking in profits and letting the market tell us what it wants to do next.  We are fairly deep into this rally and these things have to end at some point.  Pushing our luck for another few points of upside is getting greedy.

Alternate Outcome:
Markets often go further and longer than anyone expects.  Clearly this market did that since the chorus started calling for a pullback two-and-a-half month ago.  I am probably early in taking profits too, but I always prefer taking profits early because it is a lot easier to identify the next trade when holding cash.  This is a personal preference and everyone needs to find what works best for them.  Trailing stops also work well for people who are reluctant to sell on the way up.

If we are only half-way through this rally, there will be plenty of time to get back in.  Holding 1550 shows the market is ready to continue higher.  If the market is finally running out of buyers, it will fall apart fairly quickly.  If the market holds these levels, we can always buy back in.

AAPL daily at end of day

AAPL daily at end of day

INDIVIDUAL STOCKS

AAPL continues jerking traders around.  This was the second time in two-weeks the stock surged on rumors only to give back all those gains the next day.  Holders are so desperate for a catalyst they embrace any rumor that comes along.  This is not constructive behavior found in stock that is ready to bottom.  Until the it breaks the cycle of lower-lows and lower-highs, the down-trend remains intact.  Broad market weakness will likely put even more pressure on AAPL, pushing it under $400.  These things go further and longer than anyone expects and I don’t see sings AAPL’s selloff is coming to an end.

Stay safe

Mar 12

AM: A rest day

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:23 EDT

S&P500 daily at 1:23 EDT

AM Update

Early weakness threatens the seven-day winning streak.  AAPL struggles to add to yesterday’s gains.

MARKET BEHAVIOR

Stocks are modestly in the red this morning, but a down-day shouldn’t surprise anyone given the streak of seven-consecutive up-days.

MARKET SENTIMENT

Is this weakness another buy-the-dip opportunity or the start of something bigger?  Dips are buyable until they aren’t.  Every diversified portfolio is showing profits as the market keeps notching 5-year highs, but we all know this cannot last forever.  Weakness here is a no-brainer after running 70-points, but do we buy, hold, sell, or short this dip?

The most conservative option is to sit this one out.  Tops are often volatile and flush out the uncommitted at the exact wrong moment.  Changes in trend are one of the hardest times to trade because of the whipsaws and head-fakes.  The easy trade is cashing in profits and waiting for the next high-probability opportunity.

1565 is a very seductive level and traders are fixated on all-time highs, but that could cause the market come up short.  To figure out where the market is headed, we first need to understand what everyone is thinking and how they are positioned.  If everyone expects us to reach theses all-time highs, they are still holding on.  If bears also expect this, they will resist shorting.  But if everyone is holding and no one is buying, the market will stall and gravity will take over.

While earlier pullbacks bounced, selling was fueled by nervous holders and aggressive shorts. Markets quickly reversed because both of these groups lack the firepower to sustain a move.  But if the market starts selling-off here, it isn’t driven by either of these groups that are waiting for all-time highs.  Instead, this could be the start of real and sustainable selling.

TRADING OPPORTUNITIES

Expected Outcome:
The rally trade is getting a bit obvious and we should expect a pullback to at least 1550.  How the market responds to this level will give us more information about where it is headed.  Support at 1550 is constructive for a near-term continuation through all-time highs.  Failing support at 1550 would form the right-half of the head in a bearish head-and-shoulder pattern.

Either way traders with profits should consider locking them in.  We are in this to make money and the only way to do that is by selling winners.  Obviously the market will continue higher once we sell, but the goal isn’t to make all the money, just the easy stuff.

Alternate Outcome:
The market is on hot streak and there is no reason it has to end at seven-days.  We could easily see nine, ten, even twelve days in a row, especially when everyone is fixated on new all-time highs.  The race is between drying up demand and scarce supply.  Will confident and ambitious holders pull in supply faster than we use up available buyers?  Or will buying dry up and be unable to swallow the normal supply that hits the market every day?  I wish I had an answer for everyone, but this is the market and we have to make educated guesses.  At this point a couple of rest days seem more likely than extending the streak.

AAPL daily at 1:24 EST

AAPL daily at 1:24 EST

INDIVIDUAL STOCKS

AAPL gave back most of yesterday’s surge and is holding just above $430.  The key level remains $455 and buying before then is trying to catch a falling knife.  In every instance until now these strong surges were selling opportunities.  This stock is full of hopeful holders that are excited by every rumor that makes the rounds.  This shows way too much bullish and optimistic sentiment remains in the stock to sustain a meaningful rebound.  AAPL topped as the most loved stock in the market and it will likely bottom after it becomes the most hated stock and people are ashamed to admit they own it.  We are clearly not there yet.

Stay safe