Aug 312012
 

S&P500 daily @ 3:02 EDT

MARKET SENTIMENT

Headline day in the markets ended up not being very big.  Bernanke’s comments from Jackson Hole were simply parroting previous statements.  No new stimulus, but ready and willing to act if needed.  Markets opened higher, plunged at no announcement of QE3, and then like ever previous fed commentary sell-off in the last couple months, the market bounced back as quickly as it sold-off.

While the news was fairly hum-drum and the price action didn’t move us out of the previous 1400-1410 trading range, the price-action is highly noteworthy.  By many measures, not announcing QE3 today was a big disappointment for some of the most bullish traders.  This was the perfect time for the bears to take the knees out from under this market and send us into the tail-spin they are convinced we are on the verge of.  They had that fast and hard sell-off this morning to kick off an avalanche of selling, but why didn’t we plunge?  The market ran out of sellers and buyers jumped on board at the 1400 level, pushing us right back up to 1410.  So much for the theory that the market is fragile and ready to breakdown.

To me this shows the bears are exceptionally weak and overextended.  Here was the perfect set up for them and instead of raking in huge profits, they got their face ripped off in a short-squeeze.  And to be honest, the pain isn’t over for them.  Next week the rally should continue past last week’s intraday high as the last of the bears are flushed out.

While short-squeezes are powerful, they are also fleeting.  Without real buying following the short-squeeze, the market will drift lower due to a lack of support by other investors.  But the thing I am sensing from CNBC, online discussion forums, and local investor meetups is pros and amateurs alike are sitting on a lot of cash because they are afraid of this market.  These traders are modestly positive on the markets, but reluctant to buy because they fear the headlines.  As a contrarian, this shows me there is a HUGE war chest of cash ready to chase this market higher if it hits news highs.   Fear of a pullback will be replaced by fear of being left behind.

MARKET BEHAVIOR

The market continues trading in the 1400-1410 range, but volatility has picked up a bit with intra-day ranges hitting 1% over 6 of the last 12 trading days.  While 1% is still fairly modest as compared to the last several years, it does show a livelier debate brewing between bulls and bears at this key psychological 1400 level.  Looking at the price action, it the bulls have responded to everything the bears can throw at them.  The news continues to be negative and we are lacking a positive catalyst worthy of driving the market to multi-year highs, but the market is forward-looking and it sees something most don’t.

There is a saying that the market is better at predicting the news than the news is at predicting the market.  And this is the market we find ourselves in.  The market is leading bullish news out of Europe and US Economy.  By the time the news finally hits the wires, the market already made its move and it will be too late for cautious stragglers to profit off of the news.  And that could actually be the top of this rally as the market heads lower in a sell-the-news correction.

TRADING OPPORTUNITIES

Today’s upside reversal from disappointing lack of action from the Fed is highly bullish.  It shows bears are weak and bulls are strong.  Stick with the market and don’t let the heights scare you.  We’re going to breakout of this small 1400-14100 consolidation one way or the other and so far the best indication is for an upside breakout.  In the markets, the best trade is most often the hardest trade.  I could be wrong and we could see the market sell-off, but that is what sell rules are for.  Buy when other people are fearful and sell when others are greedy. The market might not be fearful they way it would at a market bottom, but there is a large amount of reluctance setting up the same trading opportunity.

FB daily @ 3:02 EDT

INDIVIDUAL STOCKS

Most everything is having a good day as the broad market is lifting all stocks.  TFM is following on to yesterday’s 50dma support.  This is a hugely volatile move over the last few days, so take that into account if anyone is adventurous enough to grab this bull by the horns.  FB continues making new lows, down 5% today.  So much for the next great thing.  In the markets, most often if you are excited to buy something, it isn’t going to work out as expected because the simple truth is most traders think alike.  If you are excited, then everyone else is excited, meaning there are few new buyers left to push prices higher.  The hard trade is usually the right trade and the easy trade is usually the wrong trade.

Stay safe

 Posted by at 3:10 pm on August 31, 2012
Aug 302012
 

S&P500 daily @ 3:07 EDT

MARKET SENTIMENT

Markets gaped lower at the open.  Is this the sell-off everyone is expecting?  Sure feels like it.  We’re near 52-week highs, the headlines are ominous, and everyone is reluctant to own this market.  To be honest, I completely appreciate the bear case here and am tempted to side with them, but the one thing that holds me back is the abundance of bearish sentiment in the markets.  Fundamental and technical traders are underweight this market because of all the above reasons, and they are good reasons, but when we start analyzing sentiment and supply and demand, the picture starts looking different.

All things being equal, the sentiment skew is set up for a move higher because most often the crowd is wrong.  The crowd already made their trades and are simply along for the ride because only new buying and selling moves market prices.  If the bears are already underweight, out of, or short this market, they have done their best to move the markets and seeing as how we are stuck near 52-week highs, they didn’t move it very far.  But the noteworthy thing is all these bears are available and able buyers if the market forces them to change their minds.  This potential upside fuel is quite bullish because these supply and demand dynamics results in the crowd most often being wrong.

The above works under normal circumstances, but there are rare occasions where stocks can keep falling even after everyone is already bearish and that is when there is a complete lack of buyers.  Stocks are always traded from one person to another, meaning someone always owns stocks.  From these owners there is always an available supply of potential sellers.  But on the flip-side no one ever has to buy stocks.  A good example of this is housing in Detroit.  Someone owns the real estate up there, but even when some houses are listed for less than $1,000, they still can’t be sold.  Even if you gave it away free it could sit on the market simply because no one wants it at any price.  Same thing can happen with stocks.  But this is the extreme case of panicked trading where value investors would rather sit on their hands than buy something at attractive prices.  We saw this phenomena in 1987, 2008 and most recently in 2010′s flash crash.  The thing to remember is these are very rare, emotionally charged environments where buyers are paralyzed by fear, and in most instances they make for great buying opportunities once the dust settles.

I don’t expect this extreme case to play out and based on conventional market sentiment and contrarian views, I’m cautiously sticking with my bullish views.  Given market dynamics of supply and demand, I expect an upside resolution to this consolidation even if we see some near term volatility first.  Remember, supply and demand always trumps opinion.

MARKET BEHAVIOR

Markets dipped under 1400 again and actually undercut Friday’s low of 1398.  But while the dip is noteworthy, we continue trading within 2% of a 52-week high, so hard to say the market is struggling and breaking down.  This is still a bull rally until the bears can prove otherwise, and minor tests of resistance levels don’t cut it.  Of note, the 50dma is ramping up and closing the gap between itself and our current levels.  Many market participants view the 50dma as a buying opportunity and it often provides support for bull markets.  The closer the 50dam comes to the current market, the less downside there is before reaching this safety net.  It wouldn’t be unheard of for a bull market to dip down to the 50dma, but isn’t necessary as markets can often levitate above the 50dma for months at a time without a check-back.

TRADING OPPORTUNITIES

Volume continues coming in far under average.  Neither the bears nor the bulls are leaning into this market in a meaningful way and it is a stand-off between the two waiting to see which side will blink first.  No doubt we could breakout of this trading range in either direction and our trading plan needs to take this binary outcome into account.  I think the probability of an upside resolution is slightly greater than a breakdown, but in the markets nothing is certain.  Stay open-minded to what the market is telling you even if you don’t want to hear what it has to say.

TFM daily @ 3:07 EDT

INDIVIDUAL STOCKS

TFM is adding to yesterday’s losses, but pausing at the 50dma.  With such volatility, there are really only two possible outcomes, crash on through the 50 or bounce off it.  Just like with the indexes, many big money managers don’t like chasing high-flying stocks and will instead wait for a pullback to the 50dma.  When a stock finds good support at the 50dma, it often means institutional investors are accumulating shares at this level and a rebound is likely.  A high volume bounce off the 50dma would be a buying opportunity, but obviously a plunge under should be avoided.  While it is no fun for anyone who holds TFM in their portfolio, reversals like this are a part of trading and why we maintain defensive sell rules.  Stick to your rules and you’ll survive to fight another day.  And lets not forget, sell rules are not just for selling, but can also help keep you from getting shaken out in a pullback.

Stay safe

 Posted by at 3:19 pm on August 30, 2012
Aug 292012
 

S&P500 daily @ 3:25 EDT

MARKET SENTIMENT

Another boring day in the markets as the S&P500 continues hovering around 1410.  This is like watching paint dry.  No doubt people are looking to Bernanke’s statements from Jackson Hole, but in all honesty this is nothing more than the market’s latest obsession.  Bernanke will say something, the market will go crazy for an hour, and then it will be forgotten as the market start obsessing about the next make-or-break data point.  Where does it end?  More importantly, does it really matter?  Is the market and financial press too obsessed with looking at its feet to see where it is going?

Most of the time I discount news because it doesn’t matter much.  Markets don’t trade on news, they move on traders’ expectations of the future.  News affects this perception to a degree, but it doesn’t move the markets, only traders do that.  The problem with news is it is always seen through participants’ preconceived biases and this distorts any story into what the market wants to see.  This is why the market can pop on horrible news and crash on great news.  If we really want to identify where the market is headed, we need to focus on other traders, not the noise.

By most measures it is hard to argue there has been much positive news in the financial press, yet the market continues rallying.  This screaming divergence means something powerful is going on under the covers and most people don’t see it.  Sometimes traders can be in denial and stubbornly holding on to positions thinking they can out-wait the storm.  This is what happened in late 2008 as the market imploded long after the cracks in the financial system were exposed to the world.  But the attitude back then was “everything is fine” and “these repressed valuations represent great buying opportunities.”  Is that where we find ourselves right now?  Are traders salivating at these attractive valuations and most traders are optimistic about the future?  I sure don’t see that surveying CNBC or StockTwits.  Seems most everyone is cautious and reluctant.

What if this divergence is due to an under-invested market?  Traders are afraid of this market because of all the perceived risks.  They fear another meltdown and it is nearly impossible to find anyone who thinks stocks are a bargain at these four-year highs.  But if the market is truly in such bad shape why has it pushed up this high?  Most experts justify the rally by saying it is overbought by novices chasing the market.  But I can tell you from first hand experience with local investor groups in my area that retail investors are not buying this market, they are just as afraid of it as everyone else.  If it is not the novices moving the markets, what is pushing us higher?

I think it is lack of supply.  This is why we have low volume and rising prices.  All the sellers have already sold and everyone else is holding on.  Lack of sellers is pushing us higher and chances are this trend will continue as fear of a crash is slowly replaced by fear of being left behind.

MARKET BEHAVIOR

Frustratingly tight trade continues.  Support has moved up to 1410 for the time being.  We could see volatility surrounding Bernanke’s comments, but over the last couple months the market has initially sold off after Fed’s comments disappointed markets, but the same day the markets turned right back around and recovered those losses.  It will be interesting to see if this trend of sell-off and then rally continues this time.  If the post-comment weakness persists, it could indicate a new trend for the market, but another rebound will be a green light to stay long, or get longer.

TFM daily @ 3:22 EDT

TRADING OPPORTUNITIES

Continue holding high quality stocks breaking out of sound bases.  Most everything is working and pullbacks are minor to non-existent.

INDIVIDUAL STOCKS

FRAN and GOOG are having good days and exhibiting follow on strength to earlier breakouts.  UNFI is breaking out on volume.  On the downside, TFM surged higher and them came crashing down on huge volume.  It is still well above its July buy-point and 50dma  and doesn’t need to be sold today, but any owner should put this one on a short leash after today’s volatile moves.  And when in doubt, remember it is better to be out of the market wishing you were in, than in the market wishing you were out.

Stay safe

 Posted by at 3:32 pm on August 29, 2012
Aug 282012
 

S&P500 daily @ 3:02 EDT

MARKET SENTIMENT

Another dull day in the markets.  Indexes are again trading in a tight range, this time around the 1410-ish level.  The markets are creeping slowly higher in a stealth rally, defying all the problems generating headlines in the financial press.  Going against the market is a dangerous game and shorts are feeling the pain of the market’s stubbornness as it continues to chase them out for a loss.

I don’t expect we’ll see a material pullback until most of the bears have given up because it is their skepticism that is putting the floor under the markets.  Of course a shockingly bad headline could rattle the markets, but if the only thing we get are the bearish headlines we’ve recycled for the last six months, the markets should continue its slow, steady climb.

KORS daily @ 3:05 EDT

TRADING OPPORTUNITY

Stay long the names that are working.  While the indexes are trading sideways, the calm environment is allowing breakouts to work.  Stick with these leaders until you have a respectable 20% profit or the broad market starts getting more volatile.  But don’t get greedy and take your worthwhile profits off the table once they hit your targets.  Markets typically move in 20-25% steps before pulling back.  Take the elevator up, but avoid riding it back down.

During corrections it is often easier and more predictable to short indexes, but in uptrends the best gains will be found in individual stocks.  As always, the market is constantly changing and the best traders change their strategies along with the market.

INDIVIDUAL STOCKS

I updated the watch list with some of the stocks I’ve been mentioning over the last couple weeks.  These are not buy recommendations, but simply leading stocks showing interesting price action and worth consideration.

OTHER IDEAS

All this talk about returning to the gold standard is just asinine.  Anyone promoting this idea is exposing just how little they understand economics and global current events.  Europe is on the verge of imploding because it lacks meaningful flexibility in its currency.  They are back in a recession and possibly headed for a depression because of all the austerity measures forced on them due to a rigid currency.  Unemployment is above 20% in certain areas and they are cutting spending and programs at the worst possible time. Other examples include Argentina blowing up because of their peg to the USD.

Sure fiscal responsibility sounds great in theory, but like any theory it needs to be tested and this is where the gold standard and austerity falls flat on its face.  Similarly Communism is a wonderful idea in theory, but it failed miserably in practice.  Debt is scalable and analogies can be made between personal, corporate, and government debt.  For the government to pay for everything in cash would be like telling young couples that mortgages are bad and they should save up money to buy a house in cash even if it takes 20 or 30 years to save up.  Have you ever heard financial gurus recommending renting for 30 years so you can save and avoid having a mortgage?  Of course not because it is a stupid idea.  Or how dumb it is for recent college graduate to get a car loan so she can commute across town to a high paying job versus working for minimum wage at the corner grocery store?  Or how about advising young people to work for ten or fifteen years in low-wage jobs so they can save up and not take any student loans?  These are some of the worst financial advice a person can receive, yet this is exactly what all these ‘smart’ people are recommending for the US government.

Of course there is both good and bad debt.  Above I listed beneficial debt that pays huge dividends far above the interest payments.  But there is bad debt too, such as racking up credit card bills to finance for a vacation, a big screen TV, a fancy dinner, or pair of $300 basketball shoes.  A typical guideline is use cash for things that have a near-term benefits and use debt to finance things that provide benefits over multiple years.  Translating this to government, social services and public employee salaries should be paid in cash, but public work projects and supporting R&D should use debt so those benefits can be moved forward and start benefiting the community right away.

No doubt many people who have their head stuck in the sand will argue against this, but all they have to do is look around the world to see the these different policies in practice and the economies resulting from these decisions.  We’ve been off the gold standard since the 70s and racked up a staggering debt, but the world has never witnessed as much prosperity as the US has over the last 40 years.  This debt financed an innovation explosion like the human race has never seen before and it kicked off an economic boom that advanced the standard of living and life expectancy for everyone around the world.

There is a point at which additional debt can create drag for the system, but we are not at that point yet, mostly because of the flexibility we have with our currency.  Had we been on the gold standard as gold went from $80 to $1,800, it would have crushed our economy and made us one of the least competitive countries in the global economy.  I’d even go so far as to say it would be stupid for the government not to lock in long-term debt at these absurdly low 1.5% rates.  That is practically free money and if invested properly in our economy could provide returns many times greater than the interest payments.  If I could get loans at 1.5%, I’d buy as much rental real estate as I could get my hands on and let the money flow in.  Uncle Sam can do the same thing by investing in our country and increases in productivity and economic growth will more than pay for this trivial interest rate.  Of course having the government spend the money wisely is a different issue all together.  But even if only half of the money was invested wisely it would only accelerate the prosperity we’ve seen over the last forty years.

Stay safe

 Posted by at 3:09 pm on August 28, 2012
Aug 272012
 

S&P500 daily @ 3:05 EDT

MARKET SENTIMENT

Markets are up modestly in early trade, but that demonstrates good follow-on support for Friday’s 1400 bounce.  Constructive and sustainable gains are made by grinding higher slowly and include an occasional pullback here and there.

Bears remain cynical of this market and are arguing with Friday’s reversals.  The dip to 1400 was an excellent time to take profits on a counter-trend trade, but many bears were greedy and held on, expecting a larger slide.  And now all their profits are evaporating and turning into losses.  The market doesn’t care how thoughtful an argument is, it will run over us just the same.

Over shorter time-frames the market operates on supply and demand regardless of what the news, fundamentals, or technicals indicate the market should do.  The market goes up when shares are scarce and down when they are plentiful.   The low-volume trade we are witnessing shows few shares are available and this is contributing to the tight supply, and thus creep higher.  The bears have already sold their shares or gone short, but all their selling was unable to flood the market with supply.  The market gladly swallowed those shares and is asking for more.  No matter what the fundamentals have been, the market is headed higher and as traders we have to respect that.

MARKET BEHAVIOR

The market continues to show upside resilience with low volatility.  Sustainable rallies go up in smaller steps with low volatility and everything continues to point to a move higher.  Typically volatility will creep in prior to a reversal as the battle between bulls and bears heats up, but we are not seeing signs of that.  Most rallies end by rolling over with a more rounded and choppy top, not in a spike, so bulls have time on their side and no need to be standing by the door with a trigger-finger just yet.  If we stall again at 1425 and return to 1400, then we will need to reevaluate our bullish thesis.

TRADING OPPORTUNITIES

Stay on the long side.  Lots of breakouts to choose from, but don’t chase anything more than 5% extended from a proper buy point.  Last week’s pullback brought some stocks back into buy ranges.  If you missed those, there will be other opportunities in coming weeks from 50dma pullbacks and bounces.

INDIVIDUAL STOCKS

AAPL is higher on its successful litigation with Samsung on Friday.  But what might be a short-term victory will be a long-term loss for Apple, the industry, and consumers.  The patent system is badly broken and not able to handle the technological age we are living in.  For example, one of the patented items Apple was suing Samsung over was how when you get to the last photo on a list, the last pictures initially moves but then snaps back indicating the end of the list.  How in the world is something like that patentable?  Is it really Unique, Useful, and Non-Obvious?  Does it deserves 20 year protection in order for Apple to recover the investment spent developing it?  Is that really an invention or simply a design element?  Give me a break.

But here is the thing, this closed attitude in technology is bad for everyone because stifles innovation.  Apple won this battle, but it will lose the war when other companies start locking down every trivial ‘invention’ and that will prevent anyone from building a usable device without infringing on dozens of patents.  Apple is the current innovation leader, but so was Palm, Nokia, Motorola, and RIM.  Apple is building this culture of patent litigation and it is hurting everyone in the process.  If this stands, it could eventually spell the end of Apple’s reign as it gets out innovated by someone with other trivial “inventions” that locks Apple out of the next round of phone designs.  Congress or the Supreme Court really needs to get involved and strike down this silly business methods patent garbage.  And while their at it, eliminate patent squatting too.  Patents were intended to foster innovation by rewarding inventors, not stifle innovation by preventing everyone from doing anything.

In practice most of these mega companies simply cross license each others patents, but what this game of giants does is it locks out the small innovator without deep pockets who cannot afford to play patent roulette.  The big guys will sue any upstart out of business because every new device will infringe on dozens of existing bogus patents.  When the little guy loses, we all lose.

Stay safe

 Posted by at 3:01 pm on August 27, 2012