Thin ice

By Jani Ziedins | Intraday Analysis

S&P500 daily @ 1:20 EDT

Markets moved lower in early trade, continuing recent weakness.  The question remains how much longer can this continue?

One thing to remember is the current price is a balance between bulls and bears.  Moves occur when a slight imbalance occurs between bulls and bears due to new information or changes in sentiment.  The result is prices adjust to relocate that precise point where exactly half the money is on each side of a trade.  So while you have an opinion one way or the other, 50% of the market has the opposite view and this disagreement is what makes markets work.  The challenge for a successful trader is figuring out which side to pick.

The interesting thing to ponder is if this sell-off has become too obvious as we clearly broke support?  Most often profits go to those who get on a trade early and those showing up late are stuck with the bill.  Keeping this in mind, can we continue assuming the upward bias and overbought condition remains in the face of these horrible technicals?

Using an analogy, it seems the market is on thin-ice.  Apprehension has been building as prices decline and renewed fear of headlines is haunting traders.  But the thing about thin-ice is you only get in trouble if it breaks.  The market could easily skate past this thin patch unscathed and come out the other side ready to rally.  If this is the case, we might see the market begin bottoming soon.  But the danger with thin-ice is we are one bad headline away from a plunge where everyone panics at the same time.

Last summer we found ourselves in a similar position with lots of storm clouds on the horizon leaving investors fidgety.  Then the one headline hit that sent everyone running, S&P downgrading US debt.  The downgrade was telegraphed for months and the actual result of the downgrade turned out trivial as the Treasury market rallied in the face of the downgrade.  But once the selling started in the equity market, it quickly spiraled into a two-week free-fall as the S&P500 lost 17%.  The market was in the mood to sell-off and it found its excuse.  Could this market be setting up for the same thing right now?

The silver-lining to our current sell-off is it has been fairly orderly and so nothing like the fall-off-the-cliff we experienced last summer.  Further, traders who saw the world did not come to an end due to Euro contagion last fall will feel a sense of been-there-done-that and won’t be as panicky this time around.

All of this is a long way of saying, I think we are one bad headline away from a material sell-off, but baring that, the market could find support soon.  But if the latter case plays out, the rebound won’t signal an all-clear as any rally still has significant technical and sentiment resistance to breakthrough before moving to new highs.

As for how to trade this, the short is a bit long in the tooth as it has become fairly obvious and the market doesn’t like being obvious.  Anyone putting on new short now is a late to the party unless their game plan is entirely based on a waiting for that backbreaking trigger to send the market tumbling.  But when comparing the risk/reward, the short continues to be the more attractive trade because on the long side you are currently risking ~$3 of downside to make ~$1 of upside.   With that skew, the best play continues to be waiting.

AAPL daily @ 1:20 EDT

AAPL is dragging down the NASDAQ and its relative strength line is breaking under recent lows as it continues its trend of under performance after its awe inspiring rally last quarter.  There doesn’t seem to be much technical support because the previous rally was nearly straight up without much consolidation.  This could be hindering the stock from arresting its slide.  And much like the gold trade, sometimes overbought/oversold sentiment overrules fundamentals.  By all measures, AAPL continues to be a great company, but the trade appears too crowded and it will take some time to rebalanced sentiment before it can resume its move higher.

LULU is selling off aggressively as it is breaking support at the $70 level.  LNKD is also dropping 5%, but it is still remains above its 50dma.  These are reminders no matter how strong a stocks, very few can make progress in the face of a weak market, and high beta stocks feel the pressure more than most.

Stay safe.

Bulls struggle to hold gains

By Jani Ziedins | Intraday Analysis

NASDAQ daily @ 12:10 EDT

Markets opened up and pushed higher in early trade, but  have since given up most of those gains by late morning.  It doesn’t appear the recent selling in the indexes could be described as irrational panic selling with the tell-tale giveaway of wild moves on high volume.   But if it isn’t panic selling, is it real selling?  And if it is real selling, should we be concerned “smart” money is moving for the exits?  Could this be what we are seeing as every attempted rally is exploited by big money to liquidate even more of their long positions?   Like the tortoise and haire, quick sprints down are unsustainable and often signal a climax, but the slow and steady tends to grind down for a while. No doubt we’ll see up-days here and there, but will they have the conviction and support to reverse the new trend and sentiment taking hold in the markets?  And of course the thing to watch for is when the scale tips and complacency turns to fear as market participants start rushing for the exit en mass.  That tipping point will be a good setup for a reversal, but it will lead to some sleepless nights for anyone still trying to hold equities.  The advantage of this scenario for the nimble trader is these oversold conditions present great buying opportunities for those in tune with the market.

No doubt the above scenario is just one of several possible outcomes for the market and we need to watch closely to identify and trade the one that is playing out.  This could be nothing more than a quick shakeout to refresh the recent rally and we continue higher from here because not all sell-offs need a climax to rebound.  We could simply see the selling pressure exhaust itself and the correction ends with whimper as the market resumes higher.  But using history as a guide, a sustained 12-month rally is exceedingly rare and we should expect some gut-wrenching volatility even in the most bullish of years.  If trading stocks was easy, everyone would be rich, and as we all know that isn’t the case.  We should always expect the market to throw us curve-balls that rattle our resolve and tempt us into doing something stupid and the key to making big money in the markets is resisting the markets deception. Unfortunately that is a lot easier said than done.

GLD daily @ 12:11 EDT

FB bears are coming out of the woodwork demonstrating there is some counterweight to this seemingly euphoric trade.  I’m not sure how many are simply skeptical vs how many will actively attempt to short the stock, but a certain level of skepticism is necessary for any stock to move higher because structurally if everyone is bullish, then there is no one left to bid up the price.  The one significant headwind for a FB investor is it takes far more buying to push a $100b market cap stock to $200b than it takes to move a $2b company to $10b. This is simply the laws of diminishing returns.  The unfortunate thing for us retail investor is FB didn’t come public years ago to give us the opportunity to ride that wave up to $100b.

It is interesting to see gold selling off in the face of renewed Euro troubles.  Wasn’t this supposed to be the safe harbor to protect investors from money printing and inflation?  It might ultimately play out that way over the long-term, but it seems like gold is at the very least temporary correcting from an overbought condition.   Too many people were seeking refuge in gold and that imbalance invariably leads to a reversal.

Continued indecision

By Jani Ziedins | Intraday Analysis

NASDAQ daily @ 11:36 EDT

Stocks traded higher in the premarket, opened flat, rose early on and then retreated back to the opening levels.  The indecision is a symptom of the political uncertainty as we are moving back into a headline fearing market.  The thing to be wary of is one bad headline can do far more damage than an equally positive story will move the markets to the upside, presenting a fairly skewed risk/reward.  Further, it is almost comical to hear pundits talk about how oversold the market has become after a ~6% pullback.  Maybe I’m missing something here, but it takes a raging bull to label a 6% pullback oversold.  The interesting thing is many experts were calling for a 3-5% pullback in the markets to refresh the recent rally.  But most often the expected outcome is the least likely to occur.  So if we discount a 3-5% pullback, that leaves us with more than or less than 3-5%.  Since we’ve already sold off more than 3-5%, that eliminates less, so it looks like we are facing more.  Will it be 7-10% or 10-15%?  Who knows and only time will tell.  As I shared earlier, I would prefer to see us refresh by dropping to the 200dma before bouncing to finish the year higher because as a directional trader, I make all my money when the market is moving and the sideways chop is simply frustrating.  So here is to hoping some Euro headlines spook the market into a panicked sell-off and after the dust settles, the market comes to its senses and rallies strongly, giving us the opportunity to buy discounted shares for a quick profit.

FRAN daily @ 11:46 EDT

Seems FRAN has gone the way of INVN and turned into a wild speculating stock more suited to gambling than disciplined investing.  But breakdowns in leading names are not uncommon in corrections and what really matters is how they respond after the broad market pressure lifts.  Will these stocks remain broken, or will they form the right side of a base and present good entry points?  That is what will separate the wheat from the chaff.  There is no way to know ahead of time and we simply need to wait for the leaders to re-exert themselves and rise to the top before we pick stocks to buy in.  Bottom picking is a riskly game and is why disciplined investors don’t play it.

LNKD is one of the few leading stocks still holding up in this correction, but it will be interesting to see how it trades once it’s big brother goes public this Friday.  Will LNKD ride on the coattails of FB, or will it be cannibalized as a source of funds as it competes directly for the same pool of investors?  And what happens if FB sells-off and forms a base after the hugely hyped-up IPO frenzy dies off?  I’m actually constructive on LNKD and expect it will continue to do well even in the shadow of its much bigger brother, but there is no grantee and is why we still follow our rules no matter how much potential we see in a stock.

And a follow up to my Greece/Euro posts, just because it doesn’t make sense for Greece exit the Euro doesn’t mean it won’t happen.  Politicians and common sense mix like oil and water, so anything could happen if politicians bow to populist pressure from the ignorant masses. But we need to be extremely cautious if we see Greece and the EU making moves to remove Greece from the Euro, knowing this will be the start of the mess, not the end.  With an overnight devaluation of the Drachma in the range of 60%-70%, it will renew solvency issues for banks in the region and fan fears of more widespread contagion.  No matter what happens, we’ll get through it, but the near-term volatility will make it a rough time to be long equities.  The silver lining is the Drachma will make it super cheap to sail the Greek Isles.

Fresh undercut

By Jani Ziedins | Intraday Analysis

S&P500 daily @ 1:23 EDT

The indexes undercut their recent lows in early trading, resetting any rally attempt from last week.  But rather than trigger a cascade of stop-loss selling, the undercut quickly reversed and bounced higher, cutting the losses in half.  It is to early to say if the buyers that rushed in and propped up the market are geniuses or fools, but bottom-picking is a bold game and any disciplined CAN SLIM investor will wait for the follow through day confirmation.

The VIX continues to trade at a modest 21 and the lack of stop-loss selling triggered by a new low demonstrates most market participants are fairly comfortable at these levels and willing to hold on for the expected rebound.  So this leaves us wondering if the crowd is right or if we should take the opposite side.  No doubt I am skewed toward the contrarian view, but the truth is the crowd is more often right than wrong as sustained moves are far longer in duration than reversals that tend to happen rather quickly.  So when deciding whether or not to trade with the crowd, we first need to decide if the recent price action is part of a continuation or a reversal.  And of course time-frame matters a lot in this debate because it could very well be a short-term reversal within a longer-term continuation.

VIX daily

Again my bias continues to be for more near-term downside and I have a leveraged bearish index trade on.  I’ve been looking at struggling high-flyers for a shorting opportunity, but the volatility in both directions scares me and since I expect a more controlled pullback, an index play seemed to provide the best risk/reward.  Of course if the sell-off picks up steam, I’ll get more aggressive in individual names, but for the time being, picking up a few bucks on the downside is keeping me engaged.

Stay safe.

More thoughts on Greece

By Jani Ziedins | Intraday Analysis

The problem in the Eurozone is there is no way Greece, and others, can make good on their debts and European leaders are simply figuring out how Greece, and others, are getting off the hook.

• The simplest and most straight forward is for Greece to give its creditors the middle finger. That is how most deadbeats handle it, so what is the big deal? But economic experts are petrified of the consequences for the stiffed creditors as they become insolvent without Greece’s repayment and that will kick off a series of dominoes leading to a global depression. That sounds ugly and is why smart people are desperately looking for an alternative.
• One option is having a rich benefactor swoop in and pay off all their debts. But since no one has enough money outright, they’ll simply print it and hand it to the creditors. This lead to inflation, but that is tomorrow’s problem. But the political ramifications for this option is it appears like Greece is getting a free pass as they are bailed out by all the other hard working Europeans, making this a politically challenging option.
• An alternative is letting Greece default, but then bailing out the banks that are on the verge of collapse, heading off financial contagion and global depression. Again more money printing and the only difference between this one and the previous is whether or not Greece defaulted, but in reality, this is purely semantics because the effects of money printing will be the exact same for the Euro-zone economies. But it might be slightly more palatable to Euro citizens because it doesn’t give Greece a free-pass. But at the same time it turns into bailing out fat-cat bankers who are even less liked.
• The most extreme of the options is to shred and rewrite every single contract in Greece or pertaining to Greece as they drop out of the Euro and re-adopt the Drachma. The advantage is it give Greece the independence needed to print as much money as they need to pay off their debts. But this will be sheer contract-law chaos as everyone fights over what debts and assets stay Euros and which are converted to near worthless Drachmas. Dose Greece have authority over European creditors to force them to take Drachmas for their citizens debt, or can the foreign creditors insist on repayment in Euros? What about Greeks who have money in foreign banks? And of course the problem of financial contagion and bailout remains as creditors who are repaid with worthless Drachmas will still face insolvency as they are unable to repay their creditors with a worthless currency they received as payment.

The last item barely hints at what a monumental challenge breaking up the Euro will be because it affects every single contract written in Europe. Even separating a single nation will be a huge, tangled mess and lawyers will feed generations of their heirs with all the money they make over litigation of these existing contracts. And it doesn’t even address the financial solvency problem since Greece will still be defaulting in spirit by paying off their debt in a worthless currency.

But no matter what poison you chose, default, money printing, or breakup, the ultimate goal is to avoid paying the debt incurred either through an outright refusal to pay or some kind of inflationary devaluation where the value paid back is worth far less than the value borrowed. But the thing to realize is no matter what route is taken, the end result will always end up with the tax payers bearing the brunt of their politicians fiscal recklessness. So if all three roads lead to the exact same place, why not take the easiest one and just get it done with? And no doubt this is what will happen once the rubber hits the road and the time for action has eclipsed political posturing.

No doubt I didn’t do a great job of explaining the above logic, but the fact remains that it is next to impossible to un-bake the Euro and for better or worse that continent is stuck with it. But hard lessons were learned and going forward there will be more fiscal unity in addition to the monetary unity and we’ll see more centralized fiscal and monetary policy like we see here in the US as a collection of states under a fairly powerful central govt.

Still finding support

By Jani Ziedins | Intraday Analysis

S&P500 daily @ 12:45 EDT

Stocks are in positive territory this morning in the face of JP Morgan’s pressure on the financial sector.  The bank reported $2b in ‘hedging’ losses.  How that happened is anyone’s guess, but lack of risk management and oversight of the trading operation seems to have crucial role.

As for the indexes’ price-action, they continue to trade slightly above recent lows.  It is nice to see we have not triggered an avalanche of sell-orders, but the buy-the-dip crowd is also unable to move the market higher.  The one thing that remains intact is the series of lower-highs and lower-lows and it will take a material move from here to reverse this pattern, requiring the markets to break multiple layers of resistance before reclaiming the highs of two weeks ago.  We have the former support at 1360 that is now acting as resistance, the 50dma, and then finally moving through the 1415 and 1422 highs.  Not that it can’t be done, but these are several speed bumps along the way that will potentially slow down any move higher.

The thing that still concerns me is the lack of panic selling.  Typically the market bottoms by flushing out weak holders as it becomes irrationally over-sold.  It is this emotionally impulsive selling that lets savvy contrarian traders step in for quick profits.  In many instances orderly sell-offs are far too rational to form solid market bottom.   The lack of panic selling indicates there are still a lot of optimistic bulls out there and sentiment needs to come down a notch or two before we can bounce and head higher.  Of course I don’t have a crystal ball and the market is going to do whatever it wants to do regardless of what I think, but using history as a guide, it seems like we still might have more room on the downside.  But either way we need to take our cues from the market and respond accordingly.

Stay safe.

How do you un-bake a cake?

By Jani Ziedins | Intraday Analysis

NASDAQ daily @ 12:51 EDT

The market is finding modest support after the recent sell-off.  It opened higher, but has since retreated from the opening levels.  Even for the bull these up-days should be met with skepticism since it takes four days to confirm a rally.  If a person counts a down-day with an upside reversals as a rally attempt, today’s price action would only be day two.  With that in mind, any bull should wait for the confirmation before jumping on any potential rebound so they don’t get caught up in a suckers’ rally.

It is interesting to hear experts talk about Greece pulling out of the Euro.  I find it shocking that experts actually think this is a realistic possibility.  Everything is so intertwined it would be like trying to separate the sugar, flour, and egg from a baked cake.  It just can’t be done.  Since everyone’s bank deposits, loans, and salary is currently based on the Euro, how do you decide what money gets converted to Drachmas and what stays in Euros?  What if a Greek homeowner took a loan from a Spanish bank?  Euro or Drachma?  And even between a Greek borrower and a Greek bank?  Is the bank really going to keep the same interest rate between a Euro loan and a Drachma loan?  And for depositors, you’d be crazy to leave your money in a bank that will convert Euros to Drachmas.  Knowing that, everyone will cash out their savings and the banks will implode because they don’t have the reserves to let everyone cash out.  If you hear anyone mention Greece pulling out, that is a sign they just don’t understand what they are talking about.

The far simpler remedy is to preserve the Euro and have rest of Europe to pay Greece’s debts, or alternately let Greece go bankrupt and walk away from their debts.  And of course this might need to be repeated for most of the PIIGS, but hey, that is what money printing presses are for.  Its worked well for the US so far, so why not Europe too?  The funny thing is how opposed Germany is to money printing.  As one of the largest global exporters, a weak currency would benefit their export economy as it becomes more competitive globally.  Who would buy a Ford if you could get a BMW for the same price?

Anyway, there is a lot more to this story and it will play out over the next year.  The thing for the investor to be wary of is how this will effect sentiment and prices.  The rally over the last 6 months occurred because the markets largely discounted the Euro crisis as old and inconsequential news.  The rally in effect removed the risk premium associated with the Euro mess.  So where does that leave us right now?  With the risk premium taken out, that means a positive resolution will have little impact since it has already been accounted for.  But a Euro crash landing could hit the markets with a 50% haircut if the worst plays out.  Taking this into account, the Euro crisis effect on the markets ranges from +0% to -50%.  And for the +0% event to occur, it would require a very civil, orderly, and quick resolution to the problem.  Something that is highly unlikely to occur. Looking at those odds, it seems like the risk/reward is not in the bulls favor and they should proceed with extreme caution.

But don’t get me wrong, I’m not predicting doom and gloom for the global banking system or economy.  There is little reason to expect the Euro will unwind the global economy and I fully expect a reasonable resolution to this crisis, but the market will fret over the risk and this will pressure equity prices over the near-term.  Success for a trader is not about making economic predictions, but anticipating how other traders will react to the renewed uncertainty.

How I expect this to play out is the new leaders in France and Greece will make lots of noise to appease the base that pushed them into office, but once they come to the nitty-gritty details of hashing our a resolution with the rest of Europe, they’ll come to a similar conclusion as their predecessors because any other outcome will be even worse.  As we’ve seen in this country, it is far easier to criticize and make promises as an outside challenger than it is to lead and take responsibility for the outcome.  It will take some time for reality to set in for these new govts, but at this point they have little other choice.  But the period between now and then will be filled with landmines for the markets just like it was last summer.

Anyway, back to the markets and how to trade these insights; most likely any strength should be used as an opportunity to get out or initiate shorts.  Wait for the market to get overly bearish before looking to get back in.  And of course we might already be at that point if there are too many people with views like myself.  If that is the case, we could bounce any time now.  But either way, I’d rather be late than risk getting in too early.  Profit opportunities are like a city bus, if you miss one, another one will be along any minute, but losses are forever.  A similar saying, it is better to miss the bus than get run over by the bus.

Stay safe.

Bulls putting up a fight

By Jani Ziedins | Intraday Analysis

NASDAQ daily @ 1:07 EDT

Bulls are not rolling over dead and they continue putting up a good fight.  Yesterday the market rallied off of lows and closed in the upper end of the day’s range.  Today the market gapped down at the open, but has since bounced strongly off of the lows.  Is this resilience an encouraging sign, or a symptom of stubborn denial?

Often market participants are slow to identify shifts in the market’s personality as they cling to strategies that have been working.  This is the classic case of chasing last year’s big winners hoping for a repeat performance, but this approach is often a day late and a dollar short as it fails to account for changing conditions and sentiment.

For the last 6-months, anyone who bought the dips made good money.  And it seems a lot of traders are continuing with this same strategy as they try to bottom-pick this decline in anticipation of the next rally.  But in the markets, things work until they don’t.  And with every successful event, we move one step closer to the one that fails.

In the markets nothing is certain and to be successful we must anticipate and trade probabilities as we balance the risks and rewards.  No doubt we could bounce higher from here, but given how long the previous rally was, we need to be on alert for a shift in market personality.  Rather than chase the market, our goal should be to get in front of it as we anticipate these transitions.  For example, a great time to close positions and take profits is when you feel on top of the world and start daydreaming about what you will buy with all your expected profits.  And on the other side, when you have given up all hope and are convinced the market is about to plunge even further is when you need to start looking for stocks to buy.

Given the bounces over the last couple days, I expect we still have more room on the downside because the bulls and buy-the-dip crow has not been completely demoralized.  Once we reach that point of maximum pain, they will all run for the exit, and that capitulation will signal the end of the sell-off.  If we continue to get spooky headlines out of Europe, that point might not come until we break 1,300 on the S&P500.  This is not a prediction, but simply listing one of several possible outcomes.  And even if we fall down to 1,300, it might not be a straight line and we could saw-tooth our way lower as the buy-the-dip crowd continues to put up a fight.

As for leading stocks, they are dropping like flies as speculators are losing their appetite for risky investments.  Some of these high-fliers were holding up well, only to get whacked days later.  Little doubt these are exceptionally risky places to hideout in a correction.  And even if some of them will make it through this, if you hold 5 stocks, will the one strong stock make up for the losses in the other four that implode?  The deck is clearly stacked against retail investors in terms of knowledge, skill, experience, information, and resources, but the biggest and clearest advantage we have is our nimbleness.  We can get in and out of positions in seconds, something big money is extremely envious of.  If we fail to take advantage of our nimbleness, then we give up the only advantage we have in this game.

Stay safe.

Broken Neck

By Jani Ziedins | Intraday Analysis

S&P500 Daily @ 1:37 with Head and Shoulders

A horrible day to own speculative growth stocks as the IBD50 is getting crushed, down over 3%.  RAX ‘s 12% haircut looks modest in comparison to FOSL’s horrifying 37% plunge!

European political discord has pushed the broad markets under previous support and broken the neckline of a head and shoulders, a common reversal pattern.  Given negative headlines/fundamentals and now technicals, the bulls have little to hang their hat on as the pendulum is swinging solidly into the bear camp.

It is periods like this that challenge the home-run hitter’s resolve as they try to stomach these precipitous sell-offs in their core positions.  These are the times when following your portfolio daily can be a hindrance to a buy-and-hold investor’s performance because moves like these tempt them to sell at the wrong time due to emotional weakness.  The only way to make good money in this game is to sell on the way up or hold through the pullbacks.  Getting shaken out during normal pullbacks is the exact wrong thing to do and is what prevents most amateurs traders from capturing worthwhile profit from their good ideas.

No doubt the market could go either way, but it sure feels like this move has more room on the downside as the market demoralizes the buy-the-dip crowd and former bulls turn tail and run for cover.  Often dips make for great entry points, but this doesn’t feel like the time or place for that kind of contrarian thinking.  The best short-term trade continues to be moving to cash or for the bold, shorting.  Of course for the home-run hitter, my longer-term prognosis is for this weakness to pass and the market to resume higher in the second half of the year.  But for my nerves and account balance, I’d rather sit out the decline and wait for the rally to get back in.

Stay safe.

European upheaval

By Jani Ziedins | Intraday Analysis

S&P500 daily, end of day

Interesting to see the outcomes of French and Greek elections.  The Euro crisis fell off the front page last fall and now it looks like it is trying to nudge its way back into spotlight with key political upheavals in France and Greece.  But with all the negative talk by market pundits, the indexes held their ground today and were flat in the face of this news.  Much of that can be attributed to the market expecting these results as they were telegraphed by pre-election polling over the last few weeks. But while the actual result was expected, the consequences might not be priced in.

The problem with new govts in Greece and France means the political negotiations that took place last summer will need to be rehashed and all the uncertainty and infighting that went along with last summer’s volatility will be front and center yet again.  Since we’ve already been there and done that, I don’t expect the same amount of uncertainty, volatility, and sell-off as we saw last summer, but as everyone knows, the market hates uncertainty and no doubt this will weigh on equities.

Today’s lack of a sell-off is most likely due to the expectations that France’s and Greece’s new ‘socialist’ govts will give up the economic crushing austerity plans and instead support a more growth oriented easy money agenda.  And ultimately I think this will be a good thing for Europe and the global economy, but the near-term battles with fiscally conservative Germany will muck up the waters and the market hates uncertainty. Can the markets continue ignoring the Euro mess as it has done for the last several months, or will new infighting and breakdowns bring the story back to page one?

Ultimately I expect this will all work itself out, but over the near-term it will be hard to justify the bull-case in the face of this turmoil and the market could struggle over the summer because of it.  The market is facing an uphill battle between headline-risk and if we fall a little lower, the technicals will also be supportive of a sell-off.  For the adventurous looking to make money on the short side, now would be a good time to ready a watch-list with high-flyers that have struggled recently.  Look for the market and these watch-list stocks to break resistance on high volume and jump on board the downdraft.  But I expect this downward move will be fairly moderate, so be prepared to lock-in worthwhile profits and don’t let yourself get greedy.  Just like last fall, I expect the market will find its footing once the it realizes the fear is unjustified and the outcome becomes more clear.  This will lead to another nice year-end rally.  Of course the further away the predictions are, the less reliable they become so we will need to continue revising our expectations as events and price action unfolds.

And as always, I could be 100% backwards in this analysis and the market might rally strongly in the face of what it should do because that is how the market rolls.  The number one rule in investing is the market is bigger than we are and it can bankrupt us no matter how sound our logic is.

As always, stay safe.

For those following the blogs over the weekend, there was a technical glitch that produces a post full of gibberish.  I apologize for that and it has since been corrected.  If you wish to read that post, it will follow this post on on the main page of the website.

Disappointing employment numbers

By Jani Ziedins | Intraday Analysis

S&P500 daily, end of day

Friday’s employment numbers came in under expectations and were the lowest net gains we’ve seen in six months. In addition, this was the second consecutive month employment came in under expectations and the situation was ripe for a sell-off.

But while the results were disappointing and the market sold-off, volume was relatively constrained and the indexes have not retreated to new lows. This shows waves of panic selling didn’t hit the market and the decline was relatively orderly. Some might suggest this is a positive revelation, but ironically I find the lack of concern by market participant a concern. Panic sell-offs rebound quickly, but orderly sell-offs have legitimacy and are far less prone to bouncing. No doubt markets overdo things, but they usually overdo them in dramatic fashion and we have yet to see that drama, so I expect we could have more room on the downside before we see a bounce.

IBD moved the Market Outlook into Market In Correction, so that means we need to see four days of constructive price-action before we get the green light for new purchases. And given the sentiment of other traders, that seems to be the prudent move at the moment. It makes sense to lighten up on existing positions showing any weakness and is a good excuse to weed-out under performing stocks.

INVN daily, end of day

As for individual stocks, INVN blew up in spectacular fashion, plunging 25% as they reported disappointing 250% growth. Hard to fault management for that performance, but the market can be a brutally judge, jury, and executioner as they set far higher standards. This is a painful reminder of how volatile small-cap growth stocks can be and why often it is prudent to lock in gains when you can. No doubt INVN was a trading vehicle and fundamentals took a backseat to gambling-like speculation. The interesting thing was to see the far more modest 5% loss in Thursday’s after-hour and Friday’s premarket trading, yet when the stock opened for trading it plunged beyond belief. No doubt much of that anomaly was structural in nature as the decline triggered countless autopilot stop-loss orders and it was all downhill from there. This was a dramatic flush out and it has the potential to clean the slate for INVN as it drove of most of the speculators. It will be an interesting stock to keep on the radar given its impressive earnings growth and the fact that the reduced guidance was due to external factors. No doubt is is far from a buy candidate in its present form, but I’m not convinced INVN’s run is over.

Uptrend under pressure

By Jani Ziedins | Intraday Analysis

Leading stocks had a rough day, falling far more than the modest pullback in the indexes. Live by high-beta stocks, die by high-beta stocks. While today was ugly, taken in context of last week’s progress, we have only given up a portion of the recent gains and are not in hot water yet. We continue have a some cushion before we risk breaking resistance and making new relative lows.

The problem for the current market comes when bringing in the volume of the up-days vs the down-days. The largest volume days have either been down-days or stalling-days ending with little gain.

As it stands, the market seems more skewed toward the bearish case and that is why IBD’s Big Picture moved its market outlook to Market Under Pressure, but all that will be rendered irrelevant if Friday’s employment numbers are outstanding. Meeting expectations or missing expectations will most likely allow the bear case to develop. At this point it is too late to predict what the employment numbers will be and we are left reacting to the aftermath once it is released. Regardless of the fundamentals, we need to trade our plan and respond to the price action no matter what we think should happen.

As for individual stocks, KORS, FRAN, INVN, and others had rough days giving up a large chunk of their recent gains. But that is the nature of trading high-beta stocks. One day you are a hero, the next you are a goat. But there is no such thing as easy money in the markets and the stocks with the greatest potential also are the most gut-wrenching. If it were easy, everyone would do it. Stick to your rules and use those to dictate how you respond to this market and try to keep emotional impulses in check.

Stay save and lets hope for the best Friday.

Lack of conviction continues

By Jani Ziedins | Intraday Analysis

NASDAQ daily @ 1:17 EDT

The markets had a disappointing finish yesterday, giving back most of their intra-day gains in the last hour of trading.  And this morning the market continued that reversal, opening modestly lower, but on a positive note have since bounced off of the daily lows by early afternoon.  As for absolute levels, the S&P500 is holding up reasonably well, but sticking with the ongoing lagging theme, the NASDAQ retested its 50dma again and is less technically strong.  From the price action of the indexes, it appears money managers are rotating out of the aggressive tech and small cap names and moving their money to more defensive sectors.

Given the lack of conviction by either bulls or bears, it is not surprising the indexes are continuing to churn sideways and breakouts either direction quickly lose steam.  Both headlines and sentiment have been mixed preventing a more sustained move either direction.  Maybe Friday’s employment numbers will be the catalyst that finally tips the scales one direction or the other.

LULU daily @ 1:17 EDT

KORS is adding on to yesterday’s strong move off of the 50dma.  LULU is also exerting itself, powering to new highs today.  LULU’s move doesn’t have the duration to qualify as a base and is simply a bounce off of the 50dma.  The buy range for 50dma bounces are from the 50dma all the way up to 5% above the previous high.  From that measure, both LULU and KORS are still in the buy range.

Nice rally day

By Jani Ziedins | Intraday Analysis

S&P500 daily @ 2:32 EDT

The indexes are up nicely today, reinforcing last week’s technical breakout above the recent 50dma consolidation.  Obviously my reluctance regarding the market so far has been misguided and no doubt an army of people feeling the same way I do is partially responsible for the upside we are witnessing.

The interesting thing will seeing how far this can go.  A big push behind last quarter’s monster rally was institutional investors playing catch up as the market left them in the dust.  At the moment the second quarter is in the red, so there is no pressure for big money to chase the market.  Of course that could change if we start making new highs with a few more days like today.

Friday’s employment number will be a big headline grabber, but it seems like it is less of a market moving event than it was earlier in the economic recovery.  No doubt a big surprise either way will shock the market, but anything that approaches expectations should not create too much of a wave by itself.  Of course that doesn’t mean investors won’t use it as an excuse to trade a preconceived bias they have and that could potentially trigger a larger move if enough people jump on board as part of self-fulfilling prophecy.

KORS daily @ 2:33 EDT

FIRE is having a great day, up 13% after earnings and is adding to its already impressive gains since its Feb breakout.  KORS is jumping off of its 50 in strong volume today, giving a solid entry or add point for a bull.  BWLD is flirting with its 50, but struggling to hold above it in afternoon trade.  AAPL found support at the 50 earlier in the day, but has since given back all those gains and is currently flat.

I added a tab to the CrackedMarket website with a watch-list of the stocks I am following.  This is far from a comprehensive list and many big winners will not make the list simply because by design it will be highly exclusive instead of inclusive.  The goal is not to find every stock that makes a big move, but instead be focused on identifying a highly targeted list with as few false-positives as possible.  Because of the advantages of scalability in stock investing, we only need to identify one or two big winners each year to produce great results as long as we allocate enough capital to each good idea.  The bane of a portfolio is getting stuck with dead money stocks that don’t move and water down any winning positions.  This is why I am merciless when cutting otherwise good stocks from consideration.  Further, the goal is not to find obscure stocks no one knows about yet, but instead target stocks that are starting to show up on my radar multiple times and in the early stage of generating buzz across the larger investing community.

Buy the dip or sell the rally?

By Jani Ziedins | Intraday Analysis

S&P500 daily at 1:05 EDT

Indexes are selling-off modestly for the first time since breaking above the recent trading range.  Is this a good time for people who missed the recent run to get in, or a last chance for those still holding stocks to get out at a decent price?  In typical fashion, the arguments for both directions are equally compelling.

If we use the strength of the follow through day and the performance of the recent rally’s general, AAPL, as a benchmark, it seems less than an ideal foundation for a material move higher.  But on the other side, the markets often climb a wall of worry and it is this very uncertainty that provides the best opportunity to buy early weakness and hold for a profit as other investors slowly come around.

FRAN daily @ 1:05 EDT

I am fighting a negative bias and I don’t want to let it skew my outlook, but I still find myself suspicious of this rally.  There are a lot of good stocks holding up well in this weakness, but I have yet to pull the trigger on any of them since the follow through day.  FRAN is having a great day, up 5% in a continued bounce off of its 50dma.  LNKD is also showing impressive strength after its own 50dma bounce.  SWI is holding on to an impressive move off of last week’s earnings.  On the other side, AAPL is extending a 3-day slide after its blow-out earnings.  It is pushing down toward its 50dma and a bigger risk will potentially be a test of the recent $555 low.  It seems at the moment everyone who wants AAPL already owns AAPL and no one is left to rush in and prop up the declining price.

Indexes continue holding gains

By Jani Ziedins | Intraday Analysis

S&P500 daily @ 12:15 EDT

The indexes continue to hold recent gains and are edging higher. The S&P500 is above 1400 and sitting above the recent consolidation area. Today the NASDAQ joined the S&P500 by also poking its head above its recent range. These developments continue to be constructive and supportive of yesterday’s Follow Through Day. With this positive price action, there is no reason not to venture in and try some promising stocks. Start with 1/2 positions and add on as the market continues to move up.

From a sentiment point of view, it seems like the number of bulls and bears is fairly balanced and the lack of a disproportionate disparity most likely means the moves going forward will be more modest.  Extremes in the market tend to coil up the spring and today there is not much energy bound up in the spring.  Of course this balance rarely holds up and over time we’ll see the market skew one way or the other based upon headlines, price movements, and group think.

There are some interesting individual stock stories (AAPL, AMZN, SWI, GNC, etc), but as far as the indexes go, they are fairly boring at the moment.  Give it a few weeks and no doubt traders will find some kind of drama to start obsessing about.

Markets Flat after IBD calls Follow Through Day

By Jani Ziedins | Intraday Analysis

IBD called yesterday’s 1.4% gain on the S&P500 a day 11 follow through and we are back in a Confirmed Uptrend by their measures. But waiting more than two weeks for the follow through, having average volume on the FTD, and making just 1.4% gains are three separate signs that this FTD is less potent than ideal. That doesn’t mean this one can’t work, just in the past FTDs with this less than compelling action are more prone to failure. No doubt we can find weak FTDs that worked, but on average they have a lower success rate than more powerful ones. The best thing we can do is watch the subsequent price action and not jump into this market head first without waiting for more compelling evidence to support this FTD, namely positive price gains. Start buying good looking positions and then add on when the price increases. This will let you in the market, but also manage the risk if things breakdown.

As for where we are, the markets are mostly flat today on light volume. The SPX is at the upper end of the recent trading range, just poking its head above. The NAS is in the upper half of the range, but still has a bit more progress before breaking above it. The market seems unsure of itself at these levels as neither the bear nor the bulls have the courage to buy or short this market and it is a staring contest between the two to see who will blink first.

So far the market has found good support at the 1360 level as we bounced off of that twice. A third trip to that level would be fairly bearish as there is no such thing as a bullish tripple-bottom. On the upside, we have taken a few weeks to digest recent gains and flushed out some of the irrational exuberance leading up to the end of the first quarter. The bulls were humbled by the pullback and the bears will humbled by the bounces off of support. So in these regards, the clock has been reset for both groups and we are just waiting on the price action to see which side has greater strength. Being at the upper end of the trading range means the bulls have a slight edge and just need to push us a tad higher before traders start buying the breakout. But given the positive sentiment over yesterday’s price move and regaining the 50dma, it is disappointing that there is not more follow on buying today. No doubt this indecisiveness will continue the lower volume trading we’ve seen over the last few months. But as traders, price is truth no matter what the volume is.

We have seen positive price action from the leaders that weathered the storm and there look to be good buys to invest in. I continue to be cautious and am not sold on this FTD yet, but further gains will get me in the market with both hands. If we can’t hold above the recent consolidation, there is most likely more left in the downside move.

AAPL does it again

By Jani Ziedins | Intraday Analysis

AAPL daily

AAPL blew away estimates again and is single-handedly lifting the market today.  Most of AAPL’s strength comes from iPhone sales in China as they missed iPad and Mac expectations.  The one upshot is these quarterly results don’t include a Chinese release of the new iPad, which will provide a big boost for next quarter’s results. But AAPL is warning of a slowdown in iPhone sales going forward as customers hold-off in anticipation of an iPhone5.

As for how this affects the rest of the market, we are experiencing a nice pop today and all three major indexes retook their 50dma, but are still within the previous consolidation range, so not a technical breakout yet.  Today’s 1% and 2% gains are great to see after the recent weakness, but don’t constitute a follow through day because declines over the last few days reset the rally count.  This is day two for the S&P500 and day one for the NASDAQ.  We need a strong follow through day on Friday or next week to signal this market is ready to rebound.

NASDAQ daily

And given where we are, it seems prudent to allow the market a couple days to prove itself since today’s rally is the result of a single company.  The challenge will be to see if AAPL’s results can reverse the bearish sentiment we’ve seen in the markets as of late.  Is AAPL stronger than the markets, or are the markets stronger than AAPL?  And of course it doesn’t have to be an either/or as AAPL could decouple from the markets and continue higher in the face of wider weakness.

But again, sit tight and wait for that confirmation to demonstrates it is safer to venture into the market.  We give up some profit by waiting, but we decrease the risk of losing money by being patient.

Waiting for AAPL

By Jani Ziedins | Intraday Analysis

The markets are flat to up modestly this morning as we digest yesterday’s sell-off.  Is this the level were value buyers are attracted to the market and that is who is supporting us here?  Or are we being propped up by swing traders foolishly trying to pick a bottom?  One group has a lot of weight and conviction behind them and the other is a 90lb weakling that will bail at the first sign of trouble, so it really does matter who is buying at these levels.

The one slight positive is we no longer seem to be triggering an avalanche of selling at each weak patch we encounter.    Yesterday we sliced through the 50dma and found a bottom early in the trading day and climbed from there.  But the other side of the coin, if we are not seeing panic induced selling by weak-kneed traders, then what we are seeing is real selling by institutions, and that is a lot more meaningful.

AAPL daily

The market moving earnings release will come from AAPL after the close.  AAPL was the general that lead the Q1 rally and it also represents ~12% of the NASDAQ index.  Any weakness in AAPL will surely affect the tech trade, if not the entire market.  But on the other side, a strong result from AAPL could kick off the next bull leg higher.  Given AAPL’s 50% price gain over the last few months, it really is hard not to think AAPL shares are priced for perfection and the bar is set extremely high for them.  And on top of that, virtually every ‘expert’ I’ve seen is saying you should buy the dip on AAPL.  When the market gets so one sided on a stock, it inevitably goes the other way because of the supply and demand imbalance.  Is AAPL at that point?  In a few hours we’ll know the answer.

NASDAQ continues under-performance

By Jani Ziedins | Intraday Analysis

S&P500 daily

A rough start to the week for the markets as we are down 1%+ in the first couple hours of the day with all three major indexes crashed through their 50dma.  The S&P500 and Dow are still trading in their recent consolidation areas but the NASDAQ broke support and is making a new relative low. This continues the trend of under-performance by the NASDAQ and demonstrates weakness by technology and smaller, growth companies.  Given the huge run-up and out-performance by the NASDAQ in Q1, profit taking and rotation out of this sector should not come as a surprise.

NASDAQ daily

Traders watch moving averages and trade off of them, but are secondary in psychological impact when compared to technical levels represented by concentrations of actual buying and selling activity.  It is one thing to see your stock fall under a moving average on volume, but seeing your stock fall under its purchase price generates far more anxiety.   This causes breaks under support to be far more powerful than drops under moving averages.  The NASDAQ broke under its support, but the other two indexes are holding up for the time being.  A break by those over the next couple days could signal this correction still has room on the downside.

It is not uncommon to see the markets retrace ~33% to ~66% of a move as part of a normal and healthy correction.  This is just part of the natural two-steps forward, one-step back process the markets use on their march higher.  On the S&P500 this gives us a pullback range of 1347-1275 if we use the Dec dip as the start of the current move, or 1321-1222 if we use the Oct low.

No matter what metric we use, we still have a little more to go to make this a normal and healthy correction.  As for how to trade this, we should continue to sit tight and wait for the upside confirmation before buying back in.  As for using this weakness to initiate short positions, I’m not sure this down-leg will produce the profit potential necessary to justify the risk.  As opposed to bear market conditions that make for the best shorting opportunities, this appears to simply be a normal pullback from overbought conditions.  No doubt money could be made on the short side, but you need to be very nimble with your short trades and take profits early and often because this downward move doesn’t appear like it will cover a lot of ground.  Rather than look for shorts, I think the smart move is searching for buy candidates holding up well in this sell-off so you are ready for the rebound.  But of course markets top when everything looks good so we always need to be wary of what we least expect.