Oct 11

Hope is not a strategy

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

The bull’s feeble rally attempt failed as AAPL fell apart.  Expect the market to drift lower to until we have a huge purge that puts some fear back into traders.

MARKET BEHAVIOR

Markets popped at the open, but gave back most of those gains.  AAPL is having another tough day and raining on the bull’s rally attempt.  Low-volume continues as weak bulls are still hopeful and hanging on.  Most likely the market will run those guys off in a shakeout before resuming the uptrend.

Volatility is creeping back, but only modestly so.  For the first time in a while we are seeing material down days.  This demonstrates the balance of power is more even and bears finally have a fighting chance.  That doesn’t mean we are about to breakdown, just the easy ride higher has come to an end.

MARKET SENTIMENT

Today’s rally was bound to fail.  The mini-trend lower is driven by bull’s hopes of a rebound.  They are holding through the dip because every other time it bounced.  But hope is a horrible strategy and the market is taking aim at the hopeful and complacent crowd.  A high-volume break under 1425 and the 50dma is what the market is working toward.  The sooner the market purges, the sooner we can get back to notching a 52-week high.

Trading volume remains below average and shows weak hands are still hanging on.  Today’s relatively modest pop also shows bears are not over-committed to this market because it did not trigger a massive short-squeeze like we’ve seen so many other times.  Hope by bulls and bear’s fear of getting stung again on the short side indicates we probably have more downside left.

To bottom we need to scare bulls and bring out the arrogance in bears again.  People trade their outlook and when bulls have given up and bears have gotten aggressive will indicate the point where most of the selling has already occurred and a rebound is likely.  Until then we’ll drift lower.

But remember, these are mini-sentiment trends within a larger bull move.  The dip is just a dip and the market will resume higher after sowing some fear in the market.

TRADING OPPORTUNITIES

Too early to buy the dip and too late so short the market.  Unless you are a day-trader, it is best to sit tight and wait for the purge and rebound before buying back in.  If you have a healthy profit in a stock, you can consider waiting this out, but prepare to be scared and tempted to sell before the market recovers.  If the election becomes a turning point for the market, we have to endure a few more weeks of this.

AAPL daily at end of day

INDIVIDUAL STOCKS

Buying AAPL’s dip hasn’t worked out well and anyone who bought in the last two-months is underwater.   The obvious trade is obvious, and obviously not working now.  AAPL probably won’t make for a good buy until everyone is talking about how the run is over.  The last great catalyst for AAPL was Steve Job’s medical retirement and untimely death.  That put a lot of pessimism in the stock and cleared the way for a move higher.  Now there is too much optimism and everyone who wants a piece of AAPL already has one.  With no new buyers remaining, the selloff will continue.  Not a crash, just a glide lower.

Stay safe

Oct 11

Low volume selloff continues

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

MARKET BEHAVIOR

Markets sagged for the 4th consecutive day.  We’re testing support at 1430 and pushing toward the 50dma.  We didn’t mark a new 52-week high like I expected, but AAPL started weighing on the markets before that could happen.  The S&P500 looks like normal profit-taking within a longer rally, but the NASDAQ is having a tougher time.  Interesting thing is while AAPL dragged us lower, it found support and finished positive for the day, but the wave of selling spread and even AAPL’s newfound resilience couldn’t prop up the market.

The market corrected more than 2% over the last 4-days, but volume each day was under average.  There are two ways to look at this.  First sellers are not rushing for the door and continuing to hold.  Prices are declining because buyers are not stepping up, preferring to wait and see.  This interpretation of low-volume is bullish because the market is not flooded with supply.  But on the other hand, the big red flag is we have not had a high-volume flush-out that clears the way for a move higher.  The low-volume selling means weak holders are still holding and chances are we need to see a high-volume capitulation point before we can turn around.  This could happen tomorrow as we penetrate the 50dma and fall under 1425 support.  Or complacency could let us drift lower for a longer period of time.  We’ll know the answer soon enough.

MARKET SENTIMENT

It feels like we are stuck in no man’s land.  There is a fair amount of pessimism in the headlines, yet there is complacency in the market as demonstrated by this low-volume selloff.  This could be a typical mid-rally consolidation that puts some fear back into complacent traders.  Most likely this slide will continue until we get that high-volume capitulation day.  That could happen tomorrow, or it could happen next week.  But we need renewed fear before the rally can continue.  The buy-the-dip trade has worked a bit too well and the market is setting up to zing those showing up late to the party.

Looking at the calendar, I think we could see the weakness and/or indecision continue into the election.  And then just for fun, the market will rally after an Obama win.  The market doesn’t like to be predictable and a rally into the end of the year will be the least expected thing to do.  Flipping buy-the-rumor, sell-the-news on its head, we should sell-the-rumor of an Obama win, and buy-the-news.  So far the market is setting up that trade.

But what I am talking about is a few percent move one-way or the other.  Sentiment is not skewed enough for a major jump either direction.  We are at similar price levels as this spring, but there was a huge level of complacency after the best Q1 rally in 20+ years.  That complacency is what enabled the big selloff.  But we are also not at the same level of pessimism we saw this summer, which fueled the 3rd quarter rally.   We’re stuck in the middle and as such we should expect a middling move from here.

TRADING OPPORTUNITIES

Buy weakness, sell strength.  The market is a pendulum swinging back and forth as market participants waver between emotional extremes.  We are on the downtake here, but wait for the capitulation point before buying the dip.  A high volume pop on surprising news could also be buyable, but the rebound will have a more solid foundation if we shake out the complacent holders first.

The market is not rife with optimism and complacency; so don’t anticipate the market breaking down.  The uptrend remains intact until further notice and shorting a bull market is a great way to lose money.  If you are short, don’t get greedy and consider taking quick profits on a break under support.

AAPL daily at end of day

INDIVIDUAL STOCKS

Sorry to keep talking about AAPL, but it is one of the most owned stocks and it represents an oversized portion of the indexes.  I’ve seen too many buy-the-dip articles concerning AAPL and that continued bullishness makes it seem like there is more downside left in the stock.  But unlike a bubble stock that crashes and burns, AAPL is the bluest of the blue-chip stocks and people will be buying every dip.  Stocks like that don’t crash, they glide lower.

I’m not saying this is what is happening with AAPL, but just be aware that AAPL won’t crash, it will drift lower.  Let that be a warning for both bulls and bears.  For bears, don’t expect huge drops, take your profits early and re-short the bounce.   For bulls, don’t let the gentle decline and repeated bounces give you a false sense of security.  In my honest opinion, there are a lot better trades in the market than buying or shorting AAPL.

Stay safe

Oct 10

Live by AAPL, die by AAPL

By Jani Ziedins | Intraday Analysis

MARKET BEHAVIOR

Markets are churning about the 1450 level again.  Last few days were above, today we are back under.  The elephant in the room in AAPL and it is crushing the NASDAQ, pushing it under the 50dma for the first time since July.  Live by AAPL, die by AAPL.  The tech-heavy and smaller-cap focused NASDAQ is showing clear signs of breaking down, falling under previous support and moving averages, but the far more diversified S&P500 is still well above support and moving averages.

The divergence in the indexes is making it harder to identify the next move.  Is the NASDAQ’s weakness a single-stock or a tech-sector issue?  Or is it broader?  Is AAPL the canary in the coalmine foretelling future problems, or is it simply an issue of a momentum stock running out of new buyers?  Or is AAPL just resting before leading the markets to new highs?

So far every dip in the market and AAPL has been a buying opportunity.  Is that still the case, or is the buy the dip patter too easy and the market wants to throw in a bigger dip or correction to keep traders honest?

MARKET SENTIMENT

Four weeks until the election.  A lot can happen in the markets over 20 trading days.  Will we correct between now and then and rally afterward?  Will we rally into the election and correct after?  Or will it not matter at all?

In spite of all the debate, headlines, and talk show chatter, Obama is the clear favorite and it would be a monumental upset if Romney took the election.  The markets are always looking at the future and no doubt an Obama reelection is expected and priced in.  If Obama does win, the market could shrug because it predicted the outcome months ago.  Or even more off the wall, the market could rally after an Obama win just to humiliate everyone who insists Obama is bad for the stock market.  The stock market doesn’t do what it is supposed to do, and rallying after an Obama win would fit the bill.

But what happens if Romney wins?  That would shock the market because it is not priced in.  No doubt the initial reaction would be a surge higher, but sticking with the unpredictability theme, a Romney win could lead to a sell off.

No doubt it is contrarian to think the market will rally under an ‘anti-business’ president and sell-off under a ‘pro-business’ president.  But that is most likely what will happen.  Obama is the status quo, Romney is change.  If there is one thing the market hates, it is change and the uncertain outcome associated with change.  We know what the rules will be under Obama and we’ll get more of the same.  Romney is promising ‘repeal and replace’.  What does that mean?  What are we going to replace Obamacare and financial regulation with?  Contrary to conventional wisdom, the market will rally under Obama’s stability and it will sell off under Romney’s restructuring.

TRADING OPPORTUNITIES

The markets could go either way here and there is more risk to owning stocks than there has been in some time.  The safer trade is to wait for higher probability opportunities.  There is enough caution and pessimism in the markets to fuel additional upside.  We are still a long way from the complacency last April that lead to the big correction, so I don’t see a similar material selloff in our near future.   But we could see buying dry up and prices decline as buyers take a wait and see approach.  This is exactly what happened today as the markets sold off on average volume.  Seller was at normal volumes, but the buyers didn’t show up.  That is why the markets declined on average volume.  Will buyers come in when prices are attractive enough?  Or is there enough uncertainty that they will wait for another few percent decline before taking the bait?

The great thing about selling strength is you are not faced with these decisions.  Take your money and start looking for the next high probability trade.  Only the greedy wait for top dollar.

INDIVIDUAL STOCKS

Hard not to talk about AAPL.  It broke under the 50dma on Monday and the selloff continued Tuesday.  But the stock reversed in late morning and recovered most of today’s losses.  Was this the bounce smart money was buying, or is it simply dumb money rushing in to buy the dip?  AAPL is a great company and a great stock.  But with nearly 5,000 institutional investors owning the company, who doesn’t already have as much AAPL as they want?  Where is the next incremental buyer who pushes the stock higher going to come from?  Of course I made this same argument at $500 and was wrong.  Time will tell.

Stay safe

Oct 05

Jobs report gives, AAPL takes away

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

MARKET BEHAVIOR

Markets popped at the open on the monthly employment report.  It’s not worth debating the nuances of the report, the market liked it and that’s what matters.  The S&P500 rose to 1470, but faded into the close.  The culprit was a stumbling AAPL.  The NASDAQ fared even worse since AAPL represents a supersized position in that index.  Live by AAPL, die by AAPL.

It is unusual for a single, volatile stock makes up such a large portion the indexes and because of that, we can’t overlook the price action of AAPL when talking about the market.  AAPL closed under the 50dma on large volume, a clear sign of distribution.  If AAPL continues breaking down, it will take the S&P500 and NASDAQ with it.

On the flip side, the S&P500 is still within 1% of a 52-week high.  Market makers make money from trading activity and no doubt they’ll do their best to push us to new highs to trigger a short squeeze and bring in all the breakout buyers.  The bigger question remains if a new high will be part of a double top, or a continuation pattern.  The market covered a lot of ground in the last 6 weeks and it wouldn’t be unusual to see it pullback and form a handle before pushing through 1475.  I’d say a new high is a done deal except the weakness we’re seeing AAPL makes things a lot cloudier.

MARKET SENTIMENT

There are still a lot of cynics who are increasingly frustrated with the market’s strength in spite of all the reason it should go down.  But I sense they are transitioning from arrogance to dejection.  Self-doubt is creeping into their psyche after getting beat-up time and time again by the market.  This is part of the slow grind turning bears into bulls.  Reluctant investors wading deeper into the market and bears buying back shorts are the new buyers pushing this market higher.  The market is ruled by supply and demand, not fundamentals and technicals.  Investors buy and sell based on their perception of fundamental and technical analysis, but it is the actual buying and selling that moves market prices, not the fundamentals and technicals.  This is a critical distinction most traders overlook and often turns into an expensive omission for many.  We are not trading stocks, we are trading other traders.

TRADING OPPORTUNITIES

The market still wants to go higher but each gain becomes harder than the one before.  We are further along into this and getting close to the end of the run before the market needs to rest and consolidate.  Keep an eye out of an opportunity to lock profits in and get ready for the next high probability trade.  We should be looking at getting out, not in at these levels.  Resist the temptation to chase.

AAPL daily at end of day

INDIVIDUAL STOCKS

Can’t ignore the negative price action in AAPL today.  Reports of a supplier strike affecting iPhone 5 production is making headlines.   IPhone buyers are a loyal group and I doubt after waited this long for their phone, a few more weeks will make them jump into Samsung’s arms.

The bigger issue facing Apple is iPhone fatigue.  From my casual observations, the iPhone is no longer the cool phone with young people and they are excited about the Samsung Galaxy S III.  Steve Jobs revolutionized the smart phone market, but the competition is catching up, and in many ways exceeding them.  Phones are becoming an extension of a person and many don’t want the same phone everyone else has (or worse their parents have!).  But this is a first world story, AAPL still has huge growth opportunities throughout the world that will easily make up for the declining market share in the developed world.  The question is if that will be enough to keep up the huge growth rates we’ve seen to this point.

Stay safe

Oct 04

Markets on track for new highs

By Jani Ziedins | Intraday Analysis

S&P500 daily @ 3:22 EDT

MARKET BEHAVIOR

Markets continued yesterday’s rally and are trading around the 1460 level.  The recent high of 1474 is easily within reach and the market feels like is being drawn back up to that level.  But the bigger question remains, will this new high will be a breakout or a double-top?

MARKET SENTIMENT

Employment numbers come out Friday and that will nudge the markets a percent or two one-way or the other.  The over the 4-month uptrend, the markets shook off any and all disappointing news.   Up until now the employment report has been win/win for the markets, high number shows economic growth, low number means more easy money from the Fed.  Will that trend continue tomorrow since we already had the QE-finity pop?

While the market could go either way, the key will be watching how other traders react to the news and the market’s price move.  Is everyone excited and relieved?  Are they all running around talking about an economic crash?   Will they say buy the dip?  Or sell the pop?

The contrarian trade is to sell confidence and complacency and buy fear and despair.  Because of the pullback last week, I don’t expect an excess of downside potential remains in the markets.  The weak holders were shaken out and there is far less selling potential left.

The most bullish outcome will be a pop above 1475 and at the same time everyone is doubtful and suspicious of the rally, claiming the market is overvalued.  The pop in price combined with the reluctance to buy means there is a lot of power behind the market and all those reluctant buyers are the fuel to drive prices higher.

The most bearish outcome would be if the report is good, but prices sell0ff and all the pundits are saying this is a great buying opportunity.    That means most are invested in the market, yet it can’t hold up and all those owners are potential sellers.

TRADING OPPORTUNITIES

Unless the employment report crashes the market, I expect we’ll set a new 52-week high in the S&P500 index fairly soon.  Even if the initial reaction to the employment report is disappointing and the markets selloff, that will represent a buying opportunity as the market regains its footing and resumes its quest for marking that new high.

The guide going forward will be responding to sentiment after the new high.  I expect a fair level of cynicism will remain and that will fuel the rally for a bit longer.  But if we see all the bears giving up and going long, then we need to take profits and wait for the market to correct.

Stay safe

 

Oct 03

Back above 1450

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

A modest 0.3% rally in the S&P500, but closing above 1450 again shows this market is not on the verge of breaking down and the bulls bucked the best the bears could throw at it last week.  Markets crash dramatically and we’ve moved beyond that risk of imploding.

MARKET BEHAVIOR

Stocks are still finding support at these levels in spite of the dramatic slide last week.  Up to this point smart money has been buying weakness and selling strength.  Selling/shorting weakness or buying strength has been a recipe for disaster.   But that is the contrarian way, go against the crowd.  But please note the important distinction, contrarian is going against the crowd, not the price.  Short when everyone is confident and complacent, not simply when the price seems too high.   Our current rally demonstrates this phenomenon where high prices have lead to even higher prices because most investors have been fearful of the market, not confident and complacent.   Buy fear, sell complacency.

MARKET SENTIMENT

For all the fear and risk in the markets, the uptrend is holding its ground.  The problem most bears are running into is all their reasons for a correction are widely talked about, and thus priced in the market.  In most instances we can safely ignore what everyone is talking about.  Only fear the risks everyone is ignoring.

For three years everyone has been talking about slow economic growth, unemployment, European contagion, money printing, and a slowing China. There is nothing new about any of these ideas and the financial press is simply recycling old headlines.

If we look back at the last major market crash in 2008, how many people knew what mortgage-backed securities, credit default swaps, and financial contagion were prior to the crash?  Where were all the gurus and pundits talking about how dangerous the market was?  We were in the middle of an election cycle and headlines focused on the two parties arguing about how bad or good the economy was.  It wasn’t until after big banks started imploding that we finally realized the severity of the situation.  That single reason is why 2012 will not turn out like 2008.

When amateur investors are talking about these risks fluently, we know we can safely ignore them.  Supply and demand dynamics in the markets makes it so all the people fearing those events have already sold, meaning there is far less downside left in the markets.  But on the flip side, the market tends to over-estimate the worst and in most instances the actual result is not nearly that bad.  When events finally play out better than feared, the markets launch ahead with all that pent-up demand rushing back into the markets.  Now this isn’t a race with a starter pistol and an official calling false starts, in this race we can jump out of the blocks early and get a head start.  And in fact this is exactly what happens most of the time as the market rallies in anticipation of a resolution and if you wait for the actual news, you are too late.

TRADING OPPORTUNITIES

Stay long, but keep looking for opportunities to lock in gains.  Technically there is another 125 S&P points of upside before we run into the 2007 highs.  I’m not sure we’ll make it all the way up there before running into an intermediate correction, but it is on the radar and not out of the realm of possibility.  The market is holding up well and refusing to crack after last weeks test, so the high probability trade continues to be on the upside.  There needs to be a bit more optimism and complacency in the markets before we see a more meaningful pullback.  But that day is getting closer.

Stay safe

Oct 02

Markets give up early gains, again

By Jani Ziedins | Intraday Analysis

Markets gave up early gains again, but are still holding key technical levels.  Assume the market is still in a rally until there are more clear signs it is breaking down and losing support.  Resist the temptation to short this ‘obviously overpriced’ market.

S&P500 daily @ 3:17 EDT

MARKET BEHAVIOR

The indexes retreated from early highs for the second day in a row.  Traditionally this is seen as a weakness, but if we look at where we are, the markets are still well within the established up-trend.  They are above the 50dma and 200dma, both moving averages are trending higher, and the market is still above the lower trend-line established in June.  There are obvious signs of indecision, but the rally has not violated key levels yet, so pronouncements of this rally’s death are premature.

One thing to remember is market tops generally rollover and rarely start with violent plunges.  These rounded-tops, double-tops, and head-and-shoulder patterns give traders time to get out.  This idea is especially critical for anyone tempted to short this market.  There is a fair amount of churn before a rally kicks-the-bucket, so it is better to be a little late than a little early.  Even if this market is topping, I wouldn’t be surprised to see it make new highs before rolling over.

MARKET SENTIMENT

Shorts are leaning on the market, buyers are reluctant to buy, and we are seeing some holders start selling.  Captain Obvious would say the market will either move up or down, and he’s right.

Without support from new buyers, the market will drift lower under its own weight.  Much of the bad news regarding Europe, US, and Asia is already priced in, same for an Obama win.  This means none of these things will lead to a market crash, but a broad reluctance to buy because of these reasons could trigger an intermediate dip.

On the other side, shorts, nervous sellers, and reluctant buyers are building the excess fuel necessary for the next push higher.   We have employment this Friday and that could send the market sharply higher, continuing the pattern of modest corrections followed by huge surges.  To this point employment has been a win-win.  Strong numbers mean the economy is recovering; weak numbers encourage more easy money from the Fed.  There always has to be a bear case for the markets to go down, and with employment that might be simply hitting the numbers.  That’s too low to show meaningful economic growth, yet not bad enough to trigger another large wave of quantitative easing.

In Q1 and Q3 of this year, sentiment was overly bearish and the easy trade was owning stocks.  Q2 corrected because making money on the long side became too easy and the chasers overcrowded the trade.  While we are at similar price levels, I don’t feel that same boundless optimism present back in March.  Investors remain cautious and paranoid of the headline risk.  This reluctance is what provides an ample supply of new buyers ready to push the market higher, and why I think there is still some upside left before the market finally tops.

TRADING OPPORTUNITIES

The market is far less skewed between bulls and bears then it was just a couple of months ago.  The rally is in later stages of the game and the probabilities of a continued rally are not as strong.  The high probability trade continues to be on the long side because of the widespread caution, reluctance, and bearishness, but the advantage is shrinking to the point where bears finally have a legitimate shot at breaking the market.  If one did a qualitative survey of the headlines and sentiment in the financial press and traders around them, it still feels like there is more cautiousness than boundless optimism and that is why I’ll stick with the long trade up to the point where it becomes overcrowded and I’ll look to go the other way.

AAPL daily at end of day

INDIVIDUAL STOCKS

AAPL found high volume support at its 50dma after a modest post iPhone5 selloff.  Seems the sales were in line with expectation and is why the stock has been selling off a tad after the excitement and hype has died off.  Next big catalysts are 3rd quarter earnings, mini-iPad, and strong holiday season.  Can this thing keep rallying like it was a small-cap, or will its size and wide ownership finally slow the stock down?  Given how hard it is to find an AAPL bear, the end could be closer than most think.  And of course the end doesn’t have to be a crash or even a selloff, it could just turn into a sideways trade.

Stay safe

 

Oct 01

Strong start, lousy finish

By Jani Ziedins | Intraday Analysis

Markets started strong, but then gave back all those gains.  While not encouraging, the market is holding up and if the markets were going to crash, they would have already.

S&P500 daily @ 3:52 EDT

MARKET BEHAVIOR

Markets jumped over 1450 in early trade after the strongest manufacturing report in months.  Initially this pop put the rally back on track and recovered most of last week’s selloff, but in the last hour of trade the market gave back the bulk of those gains.

While it is disappointing to see the market give back this headway, selloffs typically happen quickly and violently, so the buying at these levels shows this market is not grossly overvalued or on the verge of imploding.  If there were serious structural issues, the bears would have ripped the market wide open last week and that didn’t happen.  The market held together well enough and buying, not selling has been the smart move so far.

Markets always correct and without a doubt this one will too, but in the markets timing is everything   As many bears are finding out, early is the same thing as wrong.

MARKET SENTIMENT

Bears have been humbled yet again and their ranks are thinning by the day.  They are passionate over their research and analysis, but their portfolio and ego can only sustain so much damage before they are forced to reckon with reality.  We’re all in this to make money and price is the ultimate truth.

The key to succeeding in the markets is recognizing when you are wrong and changing sides as early as possible.  Obviously this minimizes losses and maximizes profit opportunities.  But unfortunately the human brain, especially the ego, is not wired for these dynamic flip-flops.  We want to be right, we need to be right, but that too often creates a blindness to evidence showing otherwise.

Remember, we’re not trading fundamentals or news.  Heck, we’re not even trading companies.  What is the benefit from owning a non-dividend paying stock?    We don’t even receive those ornate paper stock certificates anymore.  (and people complain about the USD being worthless)  For traders this is just a game and the most successful  realize they’re trading other traders. The way to make money in the markets is to anticipate the changing tide of trader sentiment in.  Prices fully reflect what people currently expect, but to make money we need to anticipate how those views will change tomorrow.  And the best way to do this is by getting in the head of other traders.

As I’ve shared earlier, this rally is getting fairly old and gains will be harder to come by.  I don’t think the market can rally for the remainder of the year given how far we have come already and the perceived headline risk out there.  The question is, do we correct now and then rally into the end of the year?  Or rally now and then sell off into year-end?   The election will be a major psychological event and that could likely trigger a change in trend in either direction.

TRADING OPPORTUNITIES

If I were a betting man, which as a trader I am, I think the high probability trade remains sticking with this trend into the election and then looking for a new trend to close out the year.  Volatility is coming back as the balance between bears and bulls is evening out and both sides are putting up a good fight.  In volatile periods it most often pays to buy weakness and sell strength.  Don’t fall into the money pit of buying strength and selling weakness.

Stay safe

Sep 29

Market gives back a chunk of the relief rally

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day

The market continued its indecisiveness and has chewed up anyone trying to anticipate the next big move.  Don’t fall for the market’s tricks and stick to sound analysis of supply and demand.  The market often convinces you that you are wrong before finally proving you right.

MARKET BEHAVIOR

Markets gave back a big chunk of yesterday’s relief rally.  Seems a bit of the bi-polar temperament is returning to the markets, but these 1% dips and rebounds are nothing compared to what we saw just a few months back.  While it feels dramatic because the markets have been so docile lately, keep everything in perspective.  The market continues to be relatively calm and the sky is not falling in spite of what you see reported in the financial press.

Selloff volume has been greater than rebound volume, but that is not unusual for selloffs when everyone is on edge.  Stealth corrections often do more damage than ones everyone is talking about, and without a doubt this pullback is front and center.  In-your-face corrections flush out the weak holders and rebound in short order.  It is the stealth corrections where everyone is lulled to sleep by complacency that have the potential to put a large dent in your portfolio.  All the chatter and fear in the markets today means the selling will climax and we’ll find our footing.  Remember, complacency is what allows bigger corrections to happen and I don’t think the market is complacent yet.

MARKET SENTIMENT

The market never wants to be easy and the long trade was getting a bit too obvious.  And of course if the long trade is too obvious, then a reversal becomes the second most expected trade by the cynics.  But to fool bulls and bears alike, the market throws in these whiplash head fakes to draw in both sides and then proceeds to humiliate and demoralize everyone.  Only after everyone is crushed and given up will the market reveal its true intentions.

There is renewed fear over Europe, yet again, but seriously, this story is three years old!  These recycled headlines are not the stuff that moves the market in major ways.  New and unexpected news moves markets, not something that has been over-analyzed ad nauseam.  Free and efficient markets are the most effective discounter of known information ever conceived and all of this noise is already priced in.  Anyone claiming what is going on in Europe, Asia, or the US is new and unexpected is deluding themselves.  Who is actually surprised that young and unemployed people in Greece and Spain are pissed off?  Really?  Common, give me a break.

So what does that mean for a trader?  Market reactions to these old headlines are not going to stick.  There are plenty of reasons the markets can head lower, but it won’t be any of the ones people are talking about right now.  Weak holders can get shaken out because of the headlines, but that selling dries up quickly and it becomes a great buying opportunity for the bold.  We will have a correction, just not yet.  The nervousness is too pervasive for the market to selloff in a material way.  We need more complacency before that happens.

TRADING OPPORTUNITIES

While there is still upside in this move, that doesn’t mean we have to sit through all these ulcer inducing gyrations and head fakes.  It is far easier to watch volatility this from the sidelines after cashing in decent gains from the earlier, easier, and more profitable portion of this rally.  Fools hold out for top dollar and only a gambler enjoys these market whips.  Buy early and sell early are the only way to beat this game and sleep well at night.  It is not wrong for an investor to hold for longer periods of time, but we are traders and our nimbleness is our greatest strength.  It would be a shame to give up the only advantage we have in this game.

Stay safe

Sep 27

Bulls come roaring back

By Jani Ziedins | Intraday Analysis

 

S&P500 daily @ 3:21 EDT

The obvious short over the last couple days is putting the hurt on a lot of premature bears.  The best trade is often the hardest trade.  Yesterday the hardest trade was buying the market.  And that turned out to be the right trade.

MARKET BEHAVIOR

The indexes staged a relief rally after five consecutive down-days, including the largest single decline in three months.  All of Bernanke’s QE-finity gains were given back as we fell to the 1430 trading range from early September.

Yesterday’s price action was a healthy pause to let investors regroup and make intelligent, rational, and informed portfolio decisions, as opposed to Monday’s crashing market that took out countless autopilot stop-losses on the way down.

No doubt a lot of today’s strength is aggressive shorts getting blown out of the water, yet again.  The time when the market sells off and the shorts are afraid to touch it will signal the real deal.  Each bear-trap moves us one step closer to that day.

MARKET SENTIMENT

We need to get in the head of the market if we want to figure out where we are headed.  Everyone who bought the Bernanke bounce was either chased out of the market or is/was underwater.  The rally was fairly obvious by that point and anyone jumping on the bandwagon was late to the party.  QE3 was the good news everyone was hoping for and after it was announced it finally felt safe to be into the markets, but as we witnessed, it was actually the most dangerous time to buy in the last three months.

It is basic human psychology combined with supply and demand dynamics that drive this market paradox.  As humans, evolution conditioned us to take emotional cues from the people around us.  If other people are freaking out, then it probably means a tiger entered the camp and even if we don’t see it with our own eyes, our survival depends on following the crowd to safety.  Same goes for complacency.  If no one else sees anything dangerous, then it is okay for us to relax too.

While this herding mentality works great in the wild, it will get your head cut off in the financial markets.  Supply and demand dynamics make it such that these rules are flipped upside down.  We can safely ignore what everyone is panicked about, but we have to fear what no one else sees.

Financial markets move based on new buying or new selling.  When the crowd thinks one-way or the other, they as the aggregate have already placed their trades and are simply waiting for other traders to come in and continue moving prices their direction.  But by the time the crowd is nearly unanimous in their views and everyone feels the most safe, all the buying has already occurred and there is no new buyers left to continue the move.  So just when you feel most comfortable is when the market is about to reverse on you.  And of course the opposite applies, when the market feels most risky is when it is often the safest to buy.

So how do we use this information?  Looking in the rearview mirror it is obvious that the safety of QE-finity was a mirage.  But we can’t trade last week, so we need to focus on what will happen tomorrow.  These five days spooked the market pretty good and brought the fight back to demoralized bears.  Riots in Greece and Spain are making everyone nervous.  The market doesn’t feel safe anymore.   And as it turns out, the best time to buy stocks was over the last two days when it felt like everything was falling apart.

An easy way to gauge market sentiment evaluating how you feel?  Does the market feel safe?  Does it feel scary?  Are you excited to buy the dip, or fearful of more downside?  If you’re relatively normal, your feelings will mirror the majority of the market.

Looking forward, the dips that scare everyone and invigorate the bears can safely be bought.  The dips that bears are afraid to short and everyone else assumes are just another great buying opportunity will turn out to be the real sell off.  After this week’s vicious bear-trap, a lot bears are likely to go into hibernation and that means we need to be far more careful of the next selloff.

TRADING OPPORTUNITIES

Looks like aggressive bears who shorted the market are getting squeezed out today.  This bounce certainly stopped the downside momentum and put many bears on the defensive.  There will be a bigger corrective wave in our future, but it usually takes a few failed attempts before one finally sticks.  More psychology is involved in why this happens, but we’ll save this for another day.  If you can’t wait, check out my March 13th post on the Psychology of a Top.

We’ll probably top 1475 in coming weeks as calm and complacency return to the markets.  You can stay long for the time being, but the more confident you are in your positions, the more seriously you need to think about selling.

Stay safe

Sep 26

Obvious correction or head fake?

By Jani Ziedins | Intraday Analysis

Markets are lower, but seem to be finding a floor, preventing a wider cascade selloff.  Have we triggered enough automatic stop-losses to clear the deck and resume our rally?  Sticking with the trend remains the high probability trade, but the returning volatility is going to make for a bumpy ride.

S&P500 daily @ 3:05 EDT

MARKET BEHAVIOR

The selloff continues as we dipped to 1430 this morning.  It’s been a while without a material selloff and the ride was getting a bit too easy for the longs.  Everyone knows the market goes two-steps forward, one-step back, but each time the step-back happens, it catches everyone off guard and they panic.

Every rally must come to an end, and so will this one.  But the thing about trends is the high-probability trade is always sticking with the trend because it continues countless times, but reverses only once.  W could be at the start of this rally’s reversal, but that doesn’t change the higher probability that this rally will continue.  From a risk/reward perspective, I’ll gladly be wrong every once in a while if it means I can be right ‘countless’ times in-between.

And of course timeframe is everything when talking about the direction of the market.  What the market does in the next ten minutes could be different than what it does later today, this year, or the next ten years.  Bears could be right over the next two days, but bulls could be right over the next two weeks.  This is why it is so important to take profits when you are right because often if you wait too long, you end up becoming wrong.

MARKET SENTIMENT

Europe is crying wolf again and the market is spooked by the street riots.  As investors we have to ask ourselves if this unrest will affect the rate of economic recovery?  This isn’t the first protest and likely won’t be the last.  Ultimately this won’t have much impact, but the market is nervous and people by nature are 2.5x more risk adverse than greedy.  This is why the markets selloff at the first hint of risk.

The biggest headwind for US stocks right now is a strengthening dollar.  Since currencies are relative, a weakening euro translates directly to a strengthening dollar.  That doesn’t mean the dollar is in good shape, just that it is less bad than the euro right now.  How this affects the equities markets is through a strong inverse relationship between the USD and the US markets.  Just one of the many reasons explaining this correlation is a weak dollar boosts the stock prices of US companies with international exposure because it increases the relative value of their overseas sales and profits.  And of course the opposite applies when the dollar increases, like we are seeing right now with the unrest in Europe.

What will ultimately determine where this dip goes is if selling cascades, or if it climaxes and exhausts itself.  It all depends on the resolve of the larger group of holders.  Will the selloff persuade previously content longs that they need to bailout?  Or will the selling pressure from nervous holders, late buyers, and early shorts fail to trigger something bigger and the market will bounce after this smaller group is done selling?  It is impossible to gauge how contagious fear is in each situation, but under most instances cooler heads prevail and value buyers jump in when prices fall to attractive levels.

TRADING OPPORTUNITIES

The easy trade is coming to a close and making money is going to become more of a chore as the volatility returns.  There is lots of debate whether this is just a dip or the start of a correction, but the great thing about being a trader is we can cash in our profits and let the market figure this out while we watch other bulls and bears get turned into minced meat.  We don’t always need to be in the markets to make money, and in fact it is less stressful to capture profits by selling into strength and then waiting for the next great trading opportunity.

Some people want to hold big winners for their entire run, but that is no longer trading, it is investing.  And if you want to invest, then you need to be as thorough and disciplined as a Warren Buffet.  If you want to hold a stock through good times and bad, that is like getting married and you better know your stock as well as your spouse if you want to hold through each base and correction.  This includes reading annual reports, every article written about a company, talking with customers, suppliers, and anyone else who can give you an insight into the growth prospects of the company.  This is far easier to do with consumer product companies like CMG, AAPL, and NFLX.  If you are naturally an early adopter, look for the new companies and products you are most excited about.  Find the cult following and huge growth opportunity Wall Street doesn’t know about yet.  But remember, to hold through good times and bad, you are marrying the stock, so you better have a lot of conviction that a dip is just a dip and not something more.

Stay safe

Sep 25

Does this mark the end of the run?

By Jani Ziedins | Intraday Analysis

S&P500 daily at end of day.

Markets had their biggest down-day in several months, but don’t jump on the correction bandwagon just yet as the market hates being obvious and will most likely chew up both bull and bears with head-fakes before revealing its true intentions.

MARKET BEHAVIOR

The markets opened higher, but started selling off in late morning trade and the slide accelerated under 1445 by late afternoon, violating previous support at 1450.

Does this mark the end of the run?  Most likely not.  Climax tops reverse quickly, so the 10-days of sideways trade at 1460 largely preclude this outcome.  Even if the market is toppy at these levels, many reversals take the shape of a double-top or a head-and-shoulders, meaning we could easily make new highs in the near-term even if the ultimate resolution is lower.  (Although we could be completing the head portion of a reversal if August is the left shoulder)

Selling or shorting today’s weakness is the obvious trade and often the obvious trade is the wrong trade.  But today’s 1% decline is noteworthy because it is the largest decline in at least three months.  This return of volatility could be the early signs of turmoil in the markets, which often precedes a reversal in direction.

As seen in the accompanying chart, the market continues to trade comfortably inside the previous uptrend channel established this summer.  We broke above it briefly with recent Bernanke pop, but have clearly retreated back within the range.  It is too early to write the rally’s obituary, but the warning signs are mounting.

MARKET SENTIMENT

It sure feels like the market is trying to selloff, but each time big money comes in and props it up.  The million-dollar question now becomes, what is ‘smart’ money doing?  Is it accumulating shares at each dip?  Or is it quietly selling to the ‘dumb’ money chasing these new highs?  People think price and volume magically give clues on this, but the truth is the market is always perfectly symmetrical because for every seller you need a willing buyer.

What ultimately determines the direction of the market is the depth of available buyers and sellers at a particular level.  Will we run out of buyers at this level first, or sellers?  Up to this point, the supply of sellers has run short and is why prices have been bid up to four-year highs.  But this is a big move since the June lows and the higher we go, the harder it becomes to find new buyers.

I still sense there is slightly more skepticism than optimism in the markets, and as we all know, people trade their portfolio according to their opinions.  The skeptics are light the market and the optimists are heavy the market.  While this balance was far more skewed a few weeks ago and lead to the explosive upside we’ve seen, the scales have become more balanced recently and this is why the bears are finally able to exert more downward pressure on the markets today.

Lacking a strong sentiment skew, the market could break either way, but more often the market tends to overdo a trend before reversing and so far it doesn’t seem like this rally has been overdone from a sentiment point of view.  But the probabilities are becoming more balanced and there is less of an edge to being long than there was a few weeks ago.

An interesting idea came from a WSJ article on Monday quoting several money managers who are allegedly thinking of closing their books at these levels and coasting through the 4th quarter.  But here is the thing, big money managers are notoriously secretive in positioning of their portfolio because they don’t want anyone to front-run their trades, so why would these guys start gushing to a reporter about what they are about to trade?  It doesn’t make any sense unless 1) they have already sold and closed their books for the year or 2) they are intentionally trying to spook the market so they can buy in at lower levels.  Either way, this sentiment by several money managers shows greed has not overtaken the market and big money remains cautious and reluctant up here.  No doubt the market could fall under its own weight if buyers fail to show up, but the fair number of skeptics remaining provides ample fuel for a continued move higher if a rising market forces them to start chasing.

The direction is a tough call here because of the recent run up, but I suspect there is more upside left in this move even if that includes a modest pullback to flush out all the weak holders who bought at the tail lend of the recent run-up.  Remember, the market is never easy, so buying after the obvious rally was a mistake and most likely so is shorting the obvious start of the correction.  I have little doubt the market will chew up both bears and bulls before this is all said and done, so wait a bit before jumping in on either side, unless of course your portfolio enjoys the feel of the market’s meat grinder.

INVESTING OPPORTUNITIES

As I’ve been saying every day for the last couple weeks, keep doing what is working, but don’t get greedy and be prepared to take your worthwhile profits off the table.  It is far more profitable to sell into strength and buy weakness than the other way around.  Sell when you don’t want to sell and buy when you don’t want to buy.  That is the fundamental core of the contrarian trading.

Stay safe

Sep 24

Don’t fight the tape

By Jani Ziedins | Intraday Analysis

Markets are down modestly, but support is holding up.  Continue holding for the time being, but if you are not in the market, don’t come rushing in now because we are closer to the end of this rally than the start.  The media and many traders are debating the upcoming election, but how the market reacts might surprise you.

S&P500 daily @ 2:47 EDT

MARKET BEHAVIOR

Another red day in the markets, but we are still holding above 1450.  This level has provided solid support and remains an encouraging sign.  Most often buying dries up quickly following unsustainable rallies.  Holding this level for more than a week shows real support and a continuation from here is more likely than a reversal.  The pattern of modest and controlled pullbacks is continuing and time will tell if this consolidation is building yet another launching pad for the next surge higher.

MARKET SENTIMENT

To date the market is largely ignoring bad news and giddy over modestly good news.  Don’t fight the tape when the market is clearly inclined to go higher.  Now this rally can’t go on forever and we are in the later innings, but so far the sellers are impotent to drive the market lower, meaning the high probability trade remains to the upside.  Only after all the bears and cynics have given up do we need to start worrying about a pullback.

A couple of key psychological mile markers on the horizon are the end of the third quarter on Friday and the election in just over a month.  I addressed Q3 in Friday’s post if you are interested.  The election is the next monumental thing after a few regular data points like the employment report in two weeks.

Conventional wisdom says a Republican win would be better for the economy and stock market, but the truth is the market is politically agnostic.  We’ve had phenomenal rallies under Democrats and crushing bear markets under Republicans, so it isn’t as simple as claiming one side is better than another.  The truth is all the market really craves is a stable business environment where it knows what all the rules are.  Uncertainty is the real demon that kills rallies because investors fear the worst when presented with ambiguity.

The pre-election poling is competitive, as is the case for most presidential elections, but I have yet to see a single poll giving Romney the edge and everything so far shows this is Obama’s election to lose.  And no doubt the market is already pricing in an Obama win since the market is always looking ahead.

But what will surprise most people is how a market expecting a Democrat win is rallying.  While Obama’s taxes and regulation are anti-business, at least everyone knows what the rules of the game are.   Romney is promising to “repeal and replace” healthcare and financial regulation, meaning all those bitter, partisan debates from the last couple years will be coming back under a Romney win.  And to further muddy the waters, Romney is promising to fire Bernanke, making the future of US monetary policy another wildcard.

Many will try to argue with me on this, but the market’s attitude is indisputable.  Clearly the markets are rallying into what looks to be an Obama reelection.  And if you need more proof, look at the reaction to the Supreme Court upholding Obamacare.  What was a crushing blow for the small-government, low-regulation, low-taxes movement has been a boon for the stock market as we are up 10% since the June 28th ruling.  The stock market preferred the certainty of Obamacare over the uncertainty of reopening the health care debate.

The key to making money in the markets isn’t thinking about what it should do, but understanding what it does.  In this case, the market clearly favors status quo over “repeal and replace”.

TRADING OPPORTUNITIES

The rally is consolidating, but all good things must eventually come to an end.  We probably have more upside left, but are closer to the end than the beginning of this run.  Be ready and willing to take worthwhile profits and wait for the next buying opportunity.  This isn’t about making all the money, just the highest probability money.  It is a fool’s game to try to pick the top, so never regret selling early.  Take your profits and move on.  It is what the most successful traders do and is what we should do.  Bulls make money, bears make money, but pigs get slaughtered.

Stay safe

Sep 21

Boring is good

By Jani Ziedins | Intraday Analysis

S&P500 daily @ 3:21 EDT

MARKET BEHAVIOR

Indexes supported yesterday’s rebound.  The key isn’t if we are up or down a quarter percent, but if there are sufficient buyers to hold current levels and fewer profit-takers pressuring prices.  Consolidations have been more modest in recent months and that trend is continuing here.

A change in market character is coming because this one is getting a bit stale.  We need to be on the lookout because often the market changes personalities with each new quarter, something to be aware of with the current quarter ending next week.

I expect the market will transition to either a more consistent grind higher, or alternately a selloff.  Grind higher seems more likely due to all the investors underweight this market, but if fear of being left behind doesn’t kick in with the reluctant crowd, buying will dry up and we’ll head lower.

MARKET SENTIMENT

This current balance between buyers and sellers is quite bullish given how many traders are fearful of these new heights.  With most stock owners demonstrating a willingness to hold, the pressure remains on those watching from the outside.

We are approaching the quarter’s end, which is important because fund managers are judged almost exclusively by their performance.  Given how many are trailing their benchmarks, we will most likely see buying continue through next week as they attempt to spin their portfolio in the best possible light.  Right now that means buying what is hot so they don’t look like the fool who missed the rally when their books are opened up to investors.

Of course the thing to be careful of is this big push into quarter’s end on climaxes on Friday.  After that fund managers’ clocks resets and they have three months left to catch their benchmarks leading into the all-important year-end.  The pressure will still be on because annual performance is even more important than quarterly performance, but the three-month window gives them some breathing room.

We could see a dip early next quarter, but with so many lagging managers, they will be quick to buy anything at a discount in an attempt to salvage this year.  Don’t expect their buying to be rational when their jobs are on the line, and many funds will reach for performance regardless of what it takes.

INVESTING OPPORTUNITIES

Same as it’s been for a while, keep doing what is working, but be ready to take worthwhile profits of 20 to 25%.  We might be in the early stages of secular bull, but there are still pullbacks, corrections, and bear markets in secular bulls.  The market is very stingy when giving out money, so always be willing to take the few gifts it is willing to hand out.  Wait too long and the market will take everything back and then some.

Stay safe

Sep 20

Bears just can’t get it done

By Jani Ziedins | Intraday Analysis

S&P500 daily @ 2:51 EDT

The predicted selloff continues to elude the “experts”.  Trading sideways at new highs is constructive and supportive of a move higher.  Keep doing what is working and ignore all the cynics who are trying to pull you on to their losing side.

MARKET BEHAVIOR

Market dipped at the open, touching 1450 before fighting its way back.  Every dip this summer was a smart buy and there is no reason to expect this time will be any different.  Trends are far more likely to continue than reverse, so the high probability trade remains betting on a continuation.  The dips in June and July were dramatic, but recent consolidations have become far more modest.

The market cannot go up every day and it often takes time to digest large gains before resuming the trend higher.  This is the hallmark of a healthy market setting up the next bull leg.  Markets that continue higher without resting are far more prone to climaxing and reversing lower when the euphoric buying exhausts itself.

MARKET SENTIMENT

Modest pullbacks are good for shaking the tree and shedding weak holders who bought late.  The weakness also tempts aggressive bears to plunge in on the short side.  But as we’ve seen over the last few months, these dips are getting smaller and weaker.  With each failed breakdown, a portion of the crowd expecting a big move lower defects to the long side and the bearish camp has less influence the further along we get.

The key to successful trading is recognizing a change in market behavior and sentiment early.  It is okay, even expected, to be wrong, but it is suicidal to stay wrong.  Bearish sentiment continues among the most stubborn, but many pessimistic traders are giving up their compelling fundamental and technical analysis and changing sides for no other reason than the market is steamrolling them.  If you can’t beat ‘em, join ‘em.  Fighting the tape is bad for your portfolio, sanity, and even health.  Too bad for many it takes a while to realize this and the most stubborn of the bunch will finally change sides, just as the market peaks and heads lower, adding insult to injury.  Always strive for nimbleness and shun stubbornness.

TRADING OPPORTUNITIES

There is no guarantee this dip will bounce, but success is managing probabilities, not predicting the future.  No doubt every successful rebound brings us one step closer to the dip that doesn’t bounce, but the smart money and risk management technique is to collect high probability profits and use those to offset the occasional low probability surprise.

A consolidation here would let some recent breakouts in individual stocks return to proper buy points, allowing anyone who missed the early part of this rally to get in at lower risk points.  Chasing is a dangerous game and those who have the patience to wait for valid entries will face far fewer nerve-wrecking whips in their portfolio.  Success in the markets is a numbers game; wait for the odds to be in your favor before putting any of your hard-earned capital at risk.

Stay Safe

Sep 19

Building the foundation for a move higher

By Jani Ziedins | Intraday Analysis

S&P500 daily @ 3:11 EDT

Stocks hold the 1460 level for the 4th day, showing solid support for this price level.  Most selloffs after an unsustainable rally happen quickly and dramatically in the day or two following.  That is not happening here and the market is building a foundation for another move higher.  Any masochists still shorting the market are going to get smacked around again.

MARKET BEHAVIOR

Indexes are treading water around 1460.  The anticipated mass exodus has yet to appear and the price-action is supportive of these levels in spite of all the “experts” predicting a move lower.    Looking back at previous selloffs this summer, they started quickly and decisively after marking a new high.  This pause at 1460 shows buying is not drying up and selling isn’t flooding the market.

MARKET SENTIMENT

Bears still think the market should head lower, but they have been burned several times and are becoming more reluctant to stick their neck out and fight this rally.  Some bears are beginning to question their resolve and are finally warming up to the bull side.  But this shift in sentiment is just starting and has a way to go before it gets overdone.

The recent short covering and increasing reluctant to fight the tape means the spring is less compressed.  Upside short-squeezes won’t be nearly as pronounced or dramatic as we’ve experienced over the last few months.  Most of the fast money on the upside has already been made and we are transiting to a grind higher mode.  Former bears and reluctant buyers will start dribbling into the markets and buying every dip, putting a solid floor under the market.  From a supply and demand point of view, this new buying and decreased selling is the recipe for a move higher.

We’re not there yet, but the rally will get to a point where it is so slow and steady traders become complacent.  And that of course is the foundation necessary for a reversal lower, but that is still a ways out and we’ll cross that bridge when we get there.

TRADING OPPORTUNITIES

It is getting harder to find new breakouts as most of the strongest stocks already made their move and are becoming extended.  The most powerful stocks tend to make their move early in a rally and late breakouts often don’t perform as well.  If you find yourself underinvested, don’t chase, wait for a pullback to the 50dma and buy the high volume bounce.  Being smart about your buy and don’t be the sucker left holding the bag when the party ends by.  Money is made by buying right.  If you missed this, don’t fret; there will always be future profit opportunities.  The one thing you don’t want to do is put yourself in a precarious situation by chasing stocks because while there will always be future profit opportunities, losses are forever.

Stay safe

Sep 18

Stocks holding up nicely

By Jani Ziedins | Intraday Analysis

S&P500 daily @ 3:38 EDT

Another tight trading day in the markets.  Technically a down-day, but such a small move is hard to flag as material.  Active trade around Thursday’s close is supportive of that new price level, even if it includes a modest slide back to 1450.  Stay long what is working, but harvest worthwhile profits because the sun can’t shine forever.

MARKET SENTIMENT

The indexes are off modestly for the second day on average volume.  This is constructive price action.  We avoided a waterfall selloff and at the same time are not rising unsustainably in a climax.  The important thing to note is current holders are not rushing for the exits.  They feel comfortable owning stocks at these levels and explains why selling volume is light and we are finding support.  On the other side, those left out of this rally are desperately hoping for a pullback to let them back in at more attractive levels.  They are reluctant to buy up here after missing the opportunity at lower levels and this foot-dragging accounts for the lighter buying volume.  But these latecomers can’t wait forever and a rising market will eventually force them to bite the bullet.  We’ll see when these reluctants start coming around in numbers because stocks will rise in a slow and steady uptrend as their buying prevents any type of pullback.

When evaluating supply and demand dynamics, combined with market sentiment, there were a lot of investors reluctant to own this market with all the headline risk and seeing short interest at five-year highs backs up this pervasive bearish theme.  But when viewed through the lens of supply and demand, this bearishness represented a large pool of available buyers.  And further, since so many investors were already out of the market, or short, that meant there were fewer available sellers remaining to push the market lower.  Large pool of potential buyers and small pool of available sellers; seems kind of obvious why the market rallied strongly these last couple months.

Traders and journalists want to assign a fundamental or technical reason to this rally, and no doubt the news played a role, but never forget, news doesn’t drive markets, traders do.  When the supply and demand became as skewed as it was recently, it made a move in one direction far more likely than. Think of it like a compressed spring.  It takes a lot of additional energy to further compress the spring, but it will uncoil by itself the first chance it gets.  And that is why the markets could pop 50 points over a couple of days.  The market wanted to go up and so it did.

I don’t think the spring is uncompressed yet, but with each surge higher we get closer to that point.  And of course the market won’t stop at zero as it almost always overshoots.  We need to watch for the point where the market is extended and thus prone for a pullback.  Up, down, up down.  That’s how the market works and getting in tune with these moves makes it far easier to make and keep profits.

MARKET BEHAVIOR

The trend since early August has been large gains followed by consolidation, before making another strong move higher.  So far the modest selloff following Thursday’s gains is consistent with this pattern.  The swing trade has been the wrong trade the last two-months and there are few sings it is the right trade today.  We could easily see a modest slide to 1450 as the market shakes out latecomers, but so far the violent moves lower are not a part of this market’s personality.  No doubt this will change at some point, just not yet.

TRADING OPPORTUNITIES

Keep doing what is working, which is buy and hold.  Let those profits bloom while the sun is shining because this calm won’t last forever.  But don’t take this too far by letting your fruit over-ripen and rot on the vine.  We’re in this to make money, not hold stocks.

PII daily @ 3:41 EDT

INDIVIDUAL STOCKS

LULU and PII are having rough days.  Both are still above their 50dma, but experiencing weakness after strong run-ups.  There is no way to know which pullbacks are normal and which are fatal.  Duration, gains, and popularity will give you a clue to how much of a run could be left, but these are just guidelines and not rules.  It is easy to make money in the markets, the challenge is keeping it.

Stay safe

Sep 17

iPhone, leader or laggard?

By Jani Ziedins | Intraday Analysis

S&P500 daily @ 3:10 EDT

The indexes are consolidating after the recent 50point move; a normal, healthy, expected, and bullish behavior after such a big run.  No reason to sell and certainly not a good idea to short the rally.  The trend is our friend……..for the time being.  AAPL is riding high after record iPhone5 sales, but is the company falling behind its peers as other phone manufacturers are leading innovation?

MARKET SENTIMENT

Stocks paused after Friday’s new 4-year high.  While giving Friday’s gains, the market is still sitting above Thursday’s “Bernanke pop”.  This is expected and supportive behavior given the 50point move over the last two-weeks.  This is noteworthy bullish action finding support at these levels in spite of the obvious selling pressure from profit taking and shorts doubling down.

The key to figuring out where we are headed is getting into the mind of traders, especially big money managers.  We’ve had a big move since the summer’s low of 1266.  This rally has caught a lot of money managers off guard because the headlines and sentiment remain quite bearish.  But clearly the price-action indicates selling climaxed in early June.  All the sellers sold at that point and there was nowhere to go but up, and that is exactly what we’ve done.  Most watched in disbelief as we rallied, always anticipating the crash that never happened.  And now these traders are faced with a crisis of confidence and conviction, finding themselves clearly on the wrong side of the market.  We are not measured by the soundness of our ideas, bu the profits in our accounts.  The market is showing no indication it will crash and is in fact accelerating its climb higher with far fewer pullbacks giving late-chasers few opportunities to buy in.

No doubt the QE3 pop was a “come-to-Jesus” moment for many reluctant money managers.  I expect this was the breaking point for many as they finally realized they could no longer wait for the pullback and now have to start getting their portfolio in gear or else significantly underperform the indexes.  To catchup, they need to chase high-beta stocks, meaning many of those speculative sectors will start outperforming after lagging large-cap, blue-chip stocks for most of the summer.  Getting ahead of big money is where us little fish make most of our money.

And of course in its usual cruel fashion, as soon as these money managers are finally positioned on the long-side, the market will run out of buyers and nose over.   The market is a cruel, cruel beast for anyone trading behind the curve.  If you want to make money at this game, you need to get ahead of the tend, not chase it.

MARKET BEHAVIOR

Indexes are finding support at 1460, showing a fair number of people are willing to buy the market at these levels and few traders are anxious enough to sell here.  For most of the summer we traded in a volatile, upward trending channel, but the last material pullback was in July.  Almost two months without a volatile pullback shows the market has transitioned into another personality for the time being.  We are in the midst of a steady climb higher, but that pattern is getting a bit obvious and proactive traders need to start watching for the next personality of this schizophrenic market to come out.  Will that be an acceleration to the upside as big money is forced to chase the market?  Or will we finally see that material selloff everyone has called for?  Or will we see both of these happen sequentially?  I’d put my money on the third option, and in fact I already have.

TRADING OPPORTUNITIES

No reason to get less-long after this run-up.  The market is finding support and is converting former bears into believers.  Ride the wave a bit longer, but stay close to the exits.  Continue holding what is working and lock in 20-25% profits when you get them.  Most of the time you’ll sell early, but it is foolish to hold out for top dollar.  If you have a stock you know better than your spouse, you can take the chance on holding through a base, but that significantly adds to your risk profile.  And in most instances these additional risks are not necessary because it is so easy to buy a stock back after stages the next breakout.

AAPL daily @ 3:11 EDT

INDIVIDUAL STOCKS

AAPL is hitting a new high and pushing against the $700 level.  There is tons of hype over the iPhone5, but as a technology geek, I am stuck wondering if AAPL is still a leader or if it is finding itself in a lagging position.  The iPhone5 lacks any real innovation and is simply playing catchup to other phones from Samsung, HTC, and yes, even Nokia.  Larger screens, quad-core processors, and 4G have been the norm in Android phones for a year now.  No doubt the iPhone5 will be the most stylish phone out there, but is that enough when Android phones are now leading in innovation?  And how about fashion trends and people’s desire to be unique?  Does the iPhone still feel cool and special when everyone has one?  The saving grace for AAPL is the exploding global middle-class, but I expect competition will put significant pricing pressure on AAPL in coming years and this might not be a buy-and-forget-it investment going forward.  No doubt momentum is behind this stock and it could continue higher in the near-term, but from a technology and innovation point of view, Apple is falling behind its peers.  Its reputation will carry it for a little longer with consumers, but remember the stock market is forward-looking and the stock price will peak before the fundamentals do.

Stay safe

Sep 14

New highs holding up

By Jani Ziedins | Intraday Analysis

Bears, cynics, short-sellers, and profit-takers can’t dent Bernanke’s rally.  Stay long what is working, but be on the lookout for the market’s impending personality change.

MARKET SENTIMENT

Follow-on strength for Bernanke’s rally is keeping markets near 52-week highs.  So far profit taking by swing traders and doubling down by shorts have been unable to dampen the party.  No doubt many cynics are reevaluating their bearish views as the market is steamrolling them and disregarding any and all logical reasons it should go lower.

It feels like we are passing the threshold between fear of a correction and moving into fear of being left behind.  Investors are quickly forgetting about all their well thought out bearish research and are instead shifting gears into chase mode.  This is a major transition in market sentiment as bears and reluctant investors are throwing out their previous opinions and jumping on the bandwagon.  This shift won’t happen simultaneously the a short squeeze does, it will occur over a period of time causing the market will wedge higher as this late demand props up the market and supports every dip.  Over shorter periods of time the market is all about supply and demand.  Bears and underinvested are coming around and buying this market, pushing it higher.

MARKET BEHAVIOR

Markets can go up, down, or sideways, and without a doubt this market is going up.    We decisively broke above recent resistance and are making 4-year highs.  The swing trade of the summer is clearly behind us and we are in the middle of a very directional move, but we must be wary of any pattern that is becoming too obvious.  Previously there was a lot of reluctance by market participants to buy these breakouts to new highs, but the tide is turning and that will impact the market’s behavior going forward.  Breakouts and consolidations could become breakouts and wedges higher.  There is still room in this move as the former cynics change their tune and roll into the market, propelling this rally further and longer than anyone expects, but that will also be the final push of this move.  Depending on how high we eventually go, we could expect a sideways consolidation if the gains are more moderate, but if the rally gets carried away, we could see a correction to compensate for the overshoot.

TRADING OPPORTUNITIES

Continue holding stocks for worthwhile profits, but at the same time don’t get greedy.  Remember, we are in this to make money, not own stocks.  This move will go further than most expect, but it will also end when everyone is most optimistic.  When you start day dreaming about what care you are going to buy with all your profits, let that be the baring warning siren to sell and wait for the next trading opportunity.

Stay safe

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Sep 13

Bernanke the Bearslayer

By Jani Ziedins | Intraday Analysis

S&P500 daily @ 2:37 EDT

Bears are proven wrong yet again.  How many times will it take before they realize they are on the wrong side of this market?

MARKET SENTIMENT

Fed announced more mortgage buying and as a result, blew all the shorts out of the water.  It is dangerous to go against the trend and no matter how many times it ends badly, people still keep doing it.  But a short squeeze can only carry this market so far; we need follow on buying to keep this rally going.

Think about what is going through the heads of big money managers underperforming this market.  A couple of weeks ago the WSJ reported only 11% of hedge funds are beating the indexes.  Days like today won’t help and now they are stuck between a rock and hard place as they try to save their jobs.  The market has not pulled back like many were expecting and the longer they wait, the further they are falling behind.  At some point the pain of regret will become too large to resist and they will plunge in and start chasing.

Today’s pop will be the final straw for many reluctant investors as they are no longer able to deny this rally’s strength.  No matter how solid their analysis is, right now they are faced with only two choices, buy this market, or lose their job.  That will be an easy choice for most, but the ironic thing is their buying will mark the start-of-the-end for this rally.  We are past the halfway point and savvy investors will be on the lookout for signs this party is coming to an end.

MARKET BEHAVIOR

Market continued the trend of tight consolidation mixed with the occasional spike.  This is stereotypical behavior of an over-shorted market where bears are getting their faces ripped off on a regular basis.  Maybe congress needs to enact some new regulation that says if something isn’t working, stop doing it!!!  Of course I really don’t mean that, these bears keep giving me all their money, and besides, legislating common sense never works.

The interesting thing will be watching if the market changes its personality in the coming weeks.  These new highs and big moves are getting fairly obvious to everyone.  And if there is one thing the market doesn’t like, it is being obvious.  We’ll probably head higher for a bit, sucking in a larger number of chasers, but by the time everyone has come around to accepting this rally, that will signal the end of it.

TRADING OPPORTUNITIES

Stay long, but start eying the exit.  There is some upside left, but we’ve come 15% since the June low.  That is a big move for the indexes and it would be foolish to expect we have another dozen percent of upside left in the tank.  The key is watching other traders for signs of when too many of them become bullish and are fully invested.  That will be our indication to start taking profits.

INDIVIDUAL STOCKS

Most everything is up today and if it isn’t, it should be dropped like the boat anchor it is.  Further, don’t chase stocks that are extended because they are prone to pulling back after some of this euphoria dies off.  If you are out of this market, wait for a valid entry point before buying in.  There will always be future profit opportunities, but losses are forever.  Don’t force a trade when you can simply wait for the next one.

Stay safe

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