Fear of Heights

By Jani Ziedins | End of Day Analysis

MARKET BEHAVIOR
Stocks finished modestly higher, setting new all-time intraday and closing highs, as buyers and sellers continue supporting these levels.  The breakout is holding recent gains and suggests we are not on the verge of breaking down.  Unsustainable levels see quick reversals and sitting above 1740 for the last seven sessions suggests this is the real deal.  Markets can do one of three things, up, down, or sideways.  We traded mostly sideways through the summer, but the market is giving every indication we already entered the next up leg.

MARKET SENTIMENT
While not a definitive measure, it is interesting to see the Stocktwits SPY sentiment gauge slip from 60% bulls to 45% bulls over the last week and a half.  No surprise sentiment surged to 60% as prices rebounded from the Default lows, but we are clearly seeing a negative shift even as the market continues making new highs.

This shows many traders are reluctant to trust these levels and they expect us to pull back from recent highs.  The thing to remember is most of these cautious traders already expressed their outlook by selling the strength.  The market has been resilient enough to swallow this profit-taking and bearish shorting without missing a step,.  Further, if those that don’t trust these levels are already out, that means there are fewer left to sell and the resulting tight supply will keep the rally alive.

Yahoo Finance had another interesting poll showing 27% still think Cash and Bonds are the best place to keep their money.  That ties big-caps and easily outpaces the NASDAQ and Small Caps.  Clearly these last two surveys of sentiment are not “overly bullish”, yet I keep hearing people claim the market is.  “Overly Bullish” is the crowd’s state of mind, not a price level, and is the mistake most of these “experts” are making.  Contrarian investing is going against the crowd and more often than not that means sticking with the trend when no one else trusts it.

TRADING OPPORTUNITIES
Expected Outcome:
Why fight what is working?  We expected the market to transition from sideways summer volatility to a directional fall move and is exactly what we’ve gotten.  Countless gurus pointed out how horrible September and October typically are and said we should stay away.  Of course many are the same people that warned us to sell in May.  As long as people don’t trust this market, expect it to continue rallying as the holdouts are forced to chase into year-end.

Alternate Outcome:
The market is running out of things to fear.  We still have Taper and another round of Debt Ceiling talks, but so far those fears are fading into the background.  Bears have been the Boy Who Cried Wolf and they are losing their credibility as each crisis turns into a false alarm.  But rather than become complacent, we must keep an eye out because the wolf is coming.  No one knows when or where, but he is coming.

Trading Plan:
It is tough to buy the market up here, but I have every expectation we will continue higher.  How we get there is a bit less certain.  Maybe we dip on a headline or maybe we melt up as underweight traders keep buying every dip.  Either way, being long is the right call and short is an exercise in futility.  Anyone in the market should keep moving up their trailing stops and ride this thing as far as it will go.

INDIVIDUAL STOCKS
AAPL reported impressive earnings, but the stock sagged after-hours on disappointing margins.  The stock is still holdable as long as it stays above $510.  The one thing that continues concerning me is how pros, amateurs, and analysts all think AAPL is a great buy.  They point to dividends, cash hoard, buybacks, and China as all reasons this stock will go higher.  But if everyone who wants AAPL already has AAPL, who is left to buy?  While I think Apple is a great company with popular products, the stock is entering a mature phase.  We saw this with MSFT, CSCO, WMT, DELL and every other great growth story before it.  There is no reason to think that AAPL is immune from the same decade of stagnant stock price.  Steve Ballmer doubled revenues and earnings at MSFT under his tenure, but the stock was stuck in the $20 for most of that time.  Cook will likely continue adding to AAPL’s bottom line, but is that enough to move the stock back to old highs?  Only time will tell.

NFLX is still suffering from the earnings reversal and Icahn hangover.  The stock is still above the 50dma and is not screaming sell just yet, but any bull better be prepared for some volatility if we slip under this widely followed moving average.

TSLA is a few days ahead of NFLX in regard to penetrated the 50dma.  Last week it tried to rally back above this key level, but failed and slipped back under today.  The stock is down seven out of the last nine days.  For any long-term holders, this might not be a bad place to take some off the table.  Sell half and lock in some profits.  The adventurous can let the house money ride.  We are in this to make money and the only way to do that is selling our winners.

Plan your trade; trade your plan

Another new high

By Jani Ziedins | Intraday Analysis

MARKET BEHAVIOR
Stocks finished at the highs of the day and set another record close.  Holding recent gains suggest we are moving past the sideways summer trade and setting up to finish the year with a bullish up-leg.

MARKET SENTIMENT
Recent volatility cleansed the markets of weak owners and replaced them with a new crop of holders that demonstrated a willingness to sit through uncertainty and weakness.  These holders are being rewarded for their confidence and patience as everyone with a diversified portfolio is sitting on profits.  When holders are rewarded for holding and sellers regret selling, it further encourages traders to hold weakness and buy dips.  While many will claim this complacency is dangerous and signals an imminent top, we must remember these things go further and longer than anyone expects.  Markets don’t top due to confident holders, they rally because no one is selling and this keeps supply is tight.  We don’t top until we run out of buyers, and given all the defensive and reactive selling we saw through the summer, there is plenty of demand itching to get back into this market.

Yahoo Finance put out a poll today that many bears will point to as a sign of complacency because the single largest response was from traders “not worried” about the rally.  While this 48% is far above the 20% bullish responses we saw a couple of months ago, it is not concerning yet.  If we consider the other responses, we see a quarter are selling defensively and another quarter are still sitting on the sidelines.  That means 52% still don’t trust this market and remain potential buyers.  48% bullish and 52% bearish is many things, but it isn’t “irrational exuberance”.

TRADING OPPORTUNITIES
Expected Outcome:
Today’s strong close shows the rally is not ready to roll over just yet.  A few weeks ago I thought we might see a sell-the-news following the debt ceiling compromise, but holding these levels for over a week demonstrates we are not running out of buyers.  Anyone left out of this rally is looking for ways to get in.  This pressure to chase will cause many to buy any and every dip.  The more people we have buying dips, the shallower and less frequent they become.

Alternate Outcome:
This rally will end like every one before it. It is easy to predict what the market will do eventually, the hard part is getting the timing right.  This rally leg is nearly a year old and the bull market is turning six soon, but there is no reason confident owners and money moving out of bonds cannot prop up this market for another twelve months.  This is not a prediction, simply stating that markets often go further and longer than anyone expects.  But it will end and it will happen when no one expects it.  We can ride the confidence and complacency higher, but stay vigilant and look for cracks signaling deeper trouble.

Trading Plan:
Recent strength is putting pressure on underweight money managers who were waiting for the widely expected correction to take some sting from their under-performance.  But instead the market is leaving them further behind and they have little choice but to chase into year-end.  Ride this rally higher and use a trailing stop to protect recent gains from the unexpected.  A stop under 1730 is not a bad place for a recent buyer to limit his exposure.

Plan your trade; trade your plan

Still holding up

By Jani Ziedins | Intraday Analysis

MARKET BEHAVIOR
Stocks made new highs in early trade, but slipped to break-even by midday.

MARKET SENTIMENT
The market is muddling along as profit-taking cannot dent recent gains, yet new buyers are reluctant to chase new highs.  Previous volatility shook out many weak owners and those left standing demonstrated they are comfortable holding.  While some claim this complacency is a bad thing, it actually supports prices.  Comfortable owners don’t sell weakness or fear mongering, meaning they keep supply out of the market and make it easier for markets to continue climbing in spite of all the calls for a top.  Don’t worry about comfortable owners, but fear a dwindling supply of potential buyers.  Given how many sold Taper, Shutdown, and Default headlines, there are plenty of recent sellers looking for a way to get back in this market.  Their dip buying will support prices and fuel the next leg higher.

TRADING OPPORTUNITIES
Expected Outcome:
Hard to argue with what is working.  Holding above 1740 for the 6th day shows there is ample demand at these levels and the next move is likely higher.  Profit-takers and cynical new-high-shorters have largely sold anything they were going to sell, meaning supply is drying up.  Even though investors are wary of new highs, it doesn’t take a lot of demand to push us higher when supply is tight.

Alternate Outcome:
The market is relieved after weathering a storm of volatility and headline uncertainty.  It is making new highs as we avoided the worst-case scenario and took a lot of risk off the table.  But with less risk priced in, it leaves us vulnerable to a new headline that is not expected.  Markets by nature are always looking for something to worry about and expect it to find something, real or imagined in the not too distant future.

Trading Plan:
Anyone out of the market can use today’s continued support above 1740 as an entry point.  If we were at unsustainable levels, the market would have rolled over by now.  But as usual, there are no guarantees and we need to cover ourselves with a stop-loss under recent support.  Slightly under 1730 gives us enough room to ride out the inevitable dip and test of support at 1740.

INDIVIDUAL STOCKS
AMZN crushed bears with yet another short-squeeze.  Fighting a stock purely on valuation is a quick way to the poor house.  Wait for price-action to crack on fundamental weakness.  This also applies to other high fliers like FB, NFLX and TSLA.  Let some other poor fool die on the cross of valuation.  When these stocks crack, there is plenty of room to fall and we can easily afford to miss the first 10%.  It is better to be a little late, than a lot early.

Plan your trade; trade your plan

Holding recent gains

By Jani Ziedins | End of Day Analysis

MARKET BEHAVIOR
Stocks recovered half of Wednesday’s sell off as buyers were willing to step in at these levels.  This is the fifth close above 1740 and we are slowly consolidating recent gains and building support.

MARKET SENTIMENT
We moved past the fiscal and political driven volatility and the market is quietly digesting third-quarter earnings.  It almost feels serene following the all the shouting and political theater a couple of weeks ago.  This calm is constructive and lets traders rationally evaluate and trade their outlook without worrying if they are standing on a trapdoor.

Trading above 1740 for a fifth-day gave profit-takers plenty of time to harvest recent gains and thus far buyers have been willing to step in and defend these levels.  Once this wave of profit-taking and cynical new-high-shorting passes, look for prices to continue rallying on tight supply.  No matter what people think the market should do, we continue making higher-highs and higher-lows and we cannot fight the trend.

Given all the fear and uncertainty over Taper, Shutdown, and Default, the fact the market held up so well signals we are not standing on a trapdoor.  The market had every invitation to breakdown, but it bounced instead.  That alone tells us the market is not “over-owned” because few owners were interested in selling the endless stream of headline fear mongering.  If anything, the market is under-owned since all the nervous sellers over the last few months are looking for a way to get back in.  Expect their demand to prop up prices as they rush to buy every dip.

TRADING OPPORTUNITIES
Expected Outcome:
Keep doing what is working.  While there is nothing wrong with locking-in recent profits, the longer we hold support, the safer it is to buy back in.  The rebound chased out most of the bears in a powerful short-squeeze, but it will take time to win over the rest of the skeptical traders standing on the sidelines.  But with year-end only two months away, expect big money to feel pressure to chase performance into the end of the year.

Alternate Outcome:
It’s been a fearful year between Fiscal Cliff, Sequester, Cyprus, Taper, Shutdown, and Default, but the market is standing as high as ever as it weathered the storm.  Right now it is hard to think of anything the collective is fretting over.  While it feels comfortable, the market is a worrywort by nature and it will quickly find, or invent, another crisis.  Depending on what it is and how worked up traders get, we could see larger selling if it catches traders off guard and causes currently confident owners to lower future expectations.

Trading Plan:
Keep a trailing stop at 1710, 1730, or 1740, depending time-frame and level of risk.  Those out of the market can look at getting in Friday if we continue holding 1740.

INDIVIDUAL STOCKS
TSLA shook off a dip under the 50dma as it recovered this widely followed level.  This is encouraging behavior since it shook out all the stop-losses under the 50dma, but selling stalled and did not cascade out of control.  If the bounce continues on high volume, it is a valid entry, but keep a tight stop since we are late in this move and the chances of failure are elevated.

AAPL continued higher as Icahn pushed for a $150b buyback.  While that would be very shareholder friendly, AAPL management typically ignores shareholder pressure.  $513 is support and the stock is holdable as long as we stay above this level.  Volatility creates great buying and shorting opportunities for the nimble swing-trader, but its been a tough ride for the buy-and-hold investor.  Expect the sideways trade to continue as momentum investors have since moved on to TSLA, NFLX, and FB.  AAPL is a great company with fantastic products, but eroding market share and declining prices will prevent it from reclaiming prior highs.

NFLX is struggling with an identity crisis following Tuesday’s massive reversal and revelations Icahn cashed in half his stake because the valuation was getting a little rich.  Expect this to put a damper on festivities for a while, but if the stock holds current levels in the face of the defensive selling and aggressive shorting, that is bullish because it is building the launching pad for the next leg higher.  For shorts, the stock doesn’t break lower soon, cover the short before you are forced to in yet another short-squeeze.

Plan your trade; trade your plan

Is the market complacent?

By Jani Ziedins | Intraday Analysis

MARKET BEHAVIOR
Stocks slipped in early trade, but found support near 1740.  We covered 110-points in two-weeks and were up nine of the last ten session; a red day was more than expected.  We remain solidly above the summer’s trading range and comfortably above the previous high of 1729.  The market often sees a directional move following a sideways summer.  We remember the scary drops, but directional trades also take us higher, and so far the upside breakout remains intact.

MARKET SENTIMENT
Nothing calms markets like rallying prices.  We transition from fear of an economic collapse due to default to all-time highs is less than two-weeks.  Not a bad reversal for those positioned to profit from a capitulation bottom, but that was then and this is now.  While fear largely evaporated, we must remember markets don’t move on fear and greed, but buying and selling.  Even though we feel better, to understand what comes next, we need to figure out how previously nervous traders are positioned following the rebound.  Did they recognize their mistake and buy the rebound within days of finding a bottom?  While that is a level-headed and disciplined reaction, often traders don’t act rationally.  After mixing in pride and stubbornness, expect a fair number of recent sellers watched this rebound in complete disbelief.  They didn’t recognize their mistake and reverse their position, they sat there paralyzed by indecision, stuck between visions of a collapse and fear of being left behind.  While much of the fear left the market, many shell-shocked traders are still sitting on the sidelines and have yet to embrace the rebound.  Even though sentiment improved, it will take time for those left out to wade back in.  This stream of buying will push the market higher into year-end.

TRADING OPPORTUNITIES
Expected Outcome:
The market will consolidate recent gains and could pullback to 1700 or 1710, but we flushed out many of the weak sellers between the June and August lows.  Expect higher prices as confident holders keep holding for more.  Don’t mistake confident owners as signs of a top, but an indication continued tight supply.  Owners holding through modest weakness and keep a floor under the market.  The real key is watching demand.  When we run out of buyers, it doesn’t matter how tight supply is.  With the huge supply of regretful sellers sitting on the sidelines, we don’t need to worry about exhausting demand anytime soon.

Alternate Outcome:
While the market came to terms with recent headlines, we are getting comfortable and that leaves us vulnerable to a new and unexpected headline that traders have not priced in.  We could go months without a worry and cannot trade the unknown, but we can wait for it and trade it decisively when it comes.

Trading Plan:
We came a long way and there is nothing wrong with locking in profits.  For those that insist on holding, keep a trailing stop under recent support at 1700. 1710, or 1730 depending your level of risk.

INDIVIDUAL STOCKS
Watching AAPL‘s product event yesterday was revealing, not so much for the incremental hardware and software upgrades, but for how they laid out their core strategy going forward.  I have to wonder if they are having a BBRY moment with their stubborn insistence on sticking to their current strategy.  Cook and Company took several shots at MSFT‘s “confused” strategy and insisted AAPL’s approach to tablets and computers would not change.  Is this similar to BBRY making fun of AAPL’s touch screen and lack of physical keyboard, claiming professionals would never embrace a soft keyboard?

In my view, AAPL is making a mistake keeping tablets and computers in separate silos.  They insist people don’t want to use a tablet like a computer and a computer like a tablet.  But let me tell you, I have enough fingerprints on my Macbook’s screen to prove otherwise.  Anyone who borrows my laptop is always trying to use the nonexistent touch interface, but Jobs said it is awkward to reach up and touch a laptop’s screens and he always knows best.  Of course he also said a 7″ tablet is “DOA” and now the iPad Mini outsells its bigger brother two to one.

Mobile operating systems, processors, and software are nothing more than placeholders until hardware specs catch up and we can fit full-powered processors and software in a tablet form factor while maintaining respectable battery life.  We should be there within two-years given the leaps INTC is making with its low-power processors.  Funny thing is AAPL already embraces these new processors in their MacBooks, achieving a shocking 12-hour battery life in the 13″ MBA.  Why do they think people don’t want a souped up tablet/keyboard combo that completely replaces their laptop?  MSFT’s “confused” strategy is to give customers everything they want and need in a single device, while AAPL thinks people want to own and use two separate devices.  How can they possibly think that when they lead the revolution that put a phone, camera, mp3 player, GPS, and web browser in a single device?  The future will continue consolidation and AAPL’s two-pronged strategy will be as obsolete as point-and-shoot cameras and hand-held GPS units.

AAPL also made a big deal about “turning the industry on its ear” by giving away software for free.  Never mind that Google’s been doing it for years and the Surface RT already includes Office, but now that AAPL is doing it, it is revolutionary.  Earlier this year Cook claimed AAPL is a software company.  I’m not sure how a software company makes money when they give away their main product for free.  Google is an advertising company that gives software away for free so they can sell more ads.  By giving away its software for free, AAPL is making a strong case that it is a hardware company and they give away the software in order to sell hardware.  What little software AAPL previously sold, they are now giving away for free, so I don’t buy the “we’re a software company” line.

And as far as software goes, I downloaded Mavericks and they need to give it away for free because it is such a minor upgrade I have yet to notice a difference.  They added iBooks and re-skinned the calendar.  Wow, color me impressed.  Oh wait, how could I forget, they added iMaps, meaning I need to hide this half-baked app on my computer just like I did on my iPhone.

Plan your trade; trade your plan

The Chase is On

By Jani Ziedins | Intraday Analysis

MARKET BEHAVIOR
Stocks ramped up following an employment report that missed expectations.  This pushes us to fresh all-time highs as we continue the nearly year-long rally off the post-election lows.  This move clearly broke the summer’s 1500-1600 trading range and is in the middle of its next directional move.

MARKET SENTIMENT
The market is well above previous highs and anyone holding a diversified portfolio is sitting on profits.  This rebound rewarded everyone who held recent weakness, making them even less likely to sell the next dip.  Fewer sellers equals tight supply, allowing us to continue rallying on modest demand.  Low-volume strength has been the theme of the year and it will likely continue into year-end.

This run-up is pressuring anyone still sitting on the sidelines.  Those that sold recent weakness are looking for ways to get back in and this surge leaves them stuck between a rock and a hard place.  Do they chase new highs, or wait for a pullback?  So far anyone waiting for a pullback keeps falling further and further behind.  They can only wait so long before they are forced to buy this strength and the pressure to chase will keep a bid under the market as the desperate buy every dip.

The market is up 20% for the year and most money managers are well short of their benchmarks.  This is the easiest buy-and-hold market no-one trusts.  Even bulls are suspicious of this strength and wondering if they should lock-in profits.  This doubt is the fuel that keeps propelling us higher.

This morning’s price-action indicates many traders still believe bad is good as they bought the weaker than expected employment.  The theory goes that prices rally on excess liquidity from QE and a struggling economy makes it more likely the Fed will keep printing money.  At least that is how the financial press is justifying today’s strength, but the truth is bears are running out of reasons to hate this market and their buying keeps pushing us higher.

TRADING OPPORTUNITIES
Expected Outcome:
The theme of 2013 has been a relentless rally that humbled anyone questioning its strength.  While this market will end like everyone before it, it will go further and longer than anyone thought possible.  Expect participants to transition from fear to greed as owners stop selling weakness and buy every dip.  While markets top on complacency and greed, they rally as these feelings take over and we only top once everyone gives up fighting the strength.  So far we are early in this transition and more upside remains.  The adjacent survey shows that while bullish sentiment increased from the low 20s a couple of months back, more traders are neutral on this market and we are still a long way from irrational exuberance.

Alternate Outcome:
The Fed and our politicians kicked their respective cans down the road and we are still awaiting the ultimate day of reckoning.  While the market is coming to terms with fiscal and monetary austerity, the uncertainty surround these events still pose risks.     But since these two topics have been so widely dissected and traders largely formed an opinion, they are less likely to trigger new waves buying and selling.  The bigger worry is an unexpected headline that no one is talking about and not priced in.  Markets only move when people change their minds and without a doubt there is something lurking out there what will cause traders to lower their expectations.  We don’t know what it is or when it will happen.  All we can do is wait and react before everyone else.

Trading Plan:
The last few weeks saw monster gains and we should be looking for places to take profits, not initiate new positions.  The cautious can sell into this strength and the optimistic can move up their trailing stops.  Given today’s strength, we could put tight stops under 1740 or 1730.  Those that want to give the market a little more room can use 1710.  Either way, don’t let recent profits evaporate.

INDIVIDUAL STOCKS
Shocking reversal on NFLX as Reed Hastings sabotages the stock one more time by insinuating the stock is getting ahead of itself.  The stock opened $35 higher and is now down more than $20.  A reversal this dramatic is unlikely to be a one day event.  High flying stocks are almost entirely sentiment driven and this reversal will likely rattle the confidence of holders and prospective buyers.  Expect demand to dry up over coming days as potential buyers wait to see if weakness persists and in a self-fulfilling prophecy, this lack of demand will pressure prices further.  If anyone wanted to short this stock, here is your invitation.  I would use yesterday’s close as a tight stop, or better yet use an option strategy to control your risk.

AAPL is in the process of releasing its new iPads.  Most of the news likely leaked out ahead of time and is already priced in.  Like the iPhone refresh earlier in the summer, we could see a buy the rumor, sell the news if AAPL doesn’t produce anything exciting and unexpected.  Jobs always killed it with his “one more thing”, but it’s been years since AAPL surprised us with anything unexpected.

TSLA is another momentum stock struggling in recent days.  It tested and slipped under the 50dma for the only the second time since this monster run began back in April.  Bulls are waiting for the dip buyers to jump in like they have every other time, but eventually there comes a point where everyone who wants some already has some.  Keep an eye on the 50dma and if we fail to hold this widely followed moving average, selling will likely continue.  Most recognize this is a momentum stock and its bubble will pop eventually.  There is nothing wrong with riding it up, but don’t take the round trip.

Plan your trade; trade your plan

Holding recent gains

By Jani Ziedins | Intraday Analysis

MARKET BEHAVIOR
Stocks dipped modestly by midday, yet continue hanging on to 1740 following the Debt Ceiling bounce.  Earlier in the day we set another all-time high as the market continues moving beyond earlier fears of Taper, Syria, Shutdown, and Default.  The rate of gains has slowed in the second half of the year and we are currently at the upper end of this channel.

MARKET SENTIMENT
Markets typically decline swiftly and grind higher, but the last six-months flipped this conventional wisdom on its head as we grind lower and explode higher.  The market is up nearly 100-points in less than two-weeks and this surge follows similarly powerful rebounds in April, June, and August.

While most bears claim this market is complacent and overbought, the evidence points to the contrary.  These explosive moves are a direct result of unsustainably negative sentiment.  The crowd pushes the market lower in anticipation of the next correction, yet the spring explodes higher in their face each time.  Too often people mistake trend for sentiment and that is exactly what bears have done.  Just because we are at all-time highs doesn’t mean we are complacent.  Traders are notoriously afraid of heights and few are embracing this strong market.  Instead they are predicting a correction following every bump in the road.  But these constant predictions of a correction keep the rally from overheating and topping.  As long as the crowd remains suspicious, the uptrend will persist and every dip is buyable.

TRADING OPPORTUNITIES
Expected Outcome:
While the recent rebound provided an excellent profit opportunity for those willing to bet against the herd, that spring is now sprung.  Clearly we cannot continue the current rate of gains and the market needs to consolidate or at the very least slow down.  Recent gains leave us with an excellent profit-taking opportunity and is the right trade for many.  As gains slow, there is less reason to hold risk for modest upside.

Looking ahead, most of the big fears have been mitigated and the risk of a dramatic move lower on existing concerns is unlikely.  Many that sold defensively in recent months need to get back in, leading to year-end rally and that constant bid under the market will grind higher over the final two months.  It is up to the individual investor to decide if grinding profits are worth the risk of the unexpected.

Alternate Outcome:
While we largely put to bed the worst fears over Taper, Syria, Shutdown, and Default, we never really had to fear them because everyone was already talking about them and thus already priced in.  We rallied as the outcome was better than the worst case and all is right with the world again…….at least until the next crisis.  Currently there is not a lot of fear priced into the market and we will rally in this calm, but that is what leaves us vulnerable to the next unseen risk.  The problem with trading the unknown is there is no way to know when it is coming and how big it will be.  All we can do is wait and respond to the next crisis before the rest of the market fully appreciates the new risk.  For the time being bears need to be patient.  Don’t sell because we are too high, sell when the market is caught off guard.

Trading Plan:
Recent gains over such a short period make a nice place for proactive traders to lock-in profits and wait for the next trade.  Others can wait for more upside, but move up your stops to protect recent gains.  If the market grinds higher into the end of the year, we should hold above 1710.  If we fall under this level, we need to reevaluate our end of year outlook.

INDIVIDUAL STOCKS
AAPL is surging higher ahead of the iPad refresh and tight supply for the iPhone5s, putting us at levels not seen since January.  It will be interesting to see if the excitement is warranted since the iPad upgrades are expected to be as evolutionary as the iPhone5s.  The market largely expects a Retina display on the mini and a new form factor for the 10″ model.  While these will help AAPL stay competitive with other tablets, it will not lead to a large wave of upgrades since these devices lack heavy subsidies.  Last year AAPL ran up to $700 on its reputation as an innovator and market leader, but even with recent upgrades to the iPhone and iPad lineups, we still haven’t seen anything truly innovative and disruptive out of AAPL in years.

TSLA is down 6% as it retests the 50dma.  If the stock finds support and bounces off this moving average, it is buyable, but if it fails to hold, expect a wave of selling to hit the stock as it crashes through large swaths of stop-losses.  If that happens, don’t buy the weakness and wait for it to find a bottom first.  With high-fliers, it is better to be a little late than a lot early.

Plan your trade; trade your plan

No deal, but markets are optimistic

By Jani Ziedins | Intraday Analysis

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

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

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

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

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

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

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

Trade your plan; plan your trade

Waiting on DC

By Jani Ziedins | Intraday Analysis

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

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

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

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

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

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

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

Plan your trade; trade your plan

Signs of hope

By Jani Ziedins | Intraday Analysis

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

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

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

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

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

Plan your trade; trade your plan

Short squeeze on signs of compromise

By Jani Ziedins | Intraday Analysis

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

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

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

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

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

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

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

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

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

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

Plan your trade; trade your plan

Are markets complacent?

By Jani Ziedins | Intraday Analysis

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Plan your trade; trade your plan

Slicing through the 50dma

By Jani Ziedins | Intraday Analysis

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

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

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

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

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

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

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

Plan your trade; trade your plan

Sideways chop continues

By Jani Ziedins | Intraday Analysis

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

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

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

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

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

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

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

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

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

Plan your trade; trade your plan

Ignore what everyone is talking about

By Jani Ziedins | Intraday Analysis

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

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

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

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

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

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

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

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

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

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

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

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

Plan your trade; trade your plan

Bipolar markets

By Jani Ziedins | Intraday Analysis

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

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

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

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

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

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

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

Plan your trade; trade your plan

Still holding up

By Jani Ziedins | Intraday Analysis

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

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

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

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

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

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

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

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

Plan your trade; trade your plan

Gov’t Shutdown, a Bullish Catalyst

By Jani Ziedins | Intraday Analysis

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

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

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

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

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

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

Plan your trade; trade your plan

AM: The party of NO

By Jani Ziedins | Intraday Analysis

AM Update

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

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

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

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

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

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

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

Plan your trade; trade your plan

AM: Down but hanging in

By Jani Ziedins | Intraday Analysis

AM Update

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

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

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

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

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

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

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

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

Plan your trade; trade your plan