Nov 302012
 

S&P500 daily at end of day

PM Update

Stocks were flat on the last trading day of the month.  The 50dma is providing overhead resistance and breaking through this level should be met with skepticism.  We’ve come a long way and it wouldn’t be surprising to see the market pullback some.

MARKET BEHAVIOR

Stocks entered a holding pattern on the last day of the month.  We ended virtually unchanged on higher volume as portfolio managers adjusted their positions for month-end.  The last 10-minutes provided some excitement as the market surged higher, trying to breakout, only to give back most of those gains in the final 5-minutes.  Portfolio managers and index funds make their trades in the final minutes of the day and their jockeying made for those last-minute fireworks.

MARKET SENTIMENT

Technically we are still under the 50dma and it is providing overhead resistance.  The 50dma is a widely followed technical indicator and breaking through could trigger a wave of short-covering and breakout buying since many traders follow the same technical trading philosophy.  But given how far we’ve come, I would be suspicious of any breakout rally and recommend waiting  a couple of days to confirm it is the real thing.

Sentiment wise it seems like a lot of the fear of the Fiscal Cliff has evaporated.  A couple of weeks ago the market was selling off as politicians extended olive branches to each other, and now we are rallying as they use press conferences to throw barbs at each other.  A bit odd if you ask me, but that is standard operating procedure for the markets.

The market often looks ahead six months or more and could have already discounted the Fiscal Cliff .  Or the market could be sucking in the last of the momentum buyers before the rally fizzles and reverses lower.  While most of the market might cognitively acknowledge the Fiscal Cliff will eventually be resolved, the fear of the unknown can overpower rational thought and herd instinct compounds these impulses.  As humans we fear risk about 2.5 times more than a similar reward and this is why the stock market sells first and asks questions later.

TRADING OPPORTUNITIES

Are we on the verge of something like we saw in the summer of 2010 and again this summer?  I don’t think so because those two cases started from a level of high complacency after big rallies.  We have sold off since September and sentiment is already fairly low.  The market could get spooked by a bad headline out of Washington, but it should find a floor fairly quickly.  We could easily break the 200dma again and even challenge the recent 1343 low.  But don’t count on going lower than that.

Another scenario is pessimism is already elevated and the Fiscal Cliff worries over the last couple weeks scared off all the emotional traders, meaning there are very few sellers left to spook out of the market.  In that case we could continue rallying into the end of the year.

The easy trade is if market plunges on Monday.  The harder read is if we pop above the 50dma.  That could be the last gasp of this rally, or it could be a continuation move and  the rally resumes.  Short-squeezes are very short-lived phenomena and within a couple of days we’ll know if a break above the 50dma is going to stick.  If it can’t hold, expect a selloff through the 200dma.  If the breakout sticks, the market doesn’t want to sell off and the smart trade is buying and holding on.

INDIVIDUAL STOCKS

Surprisingly AAPL was left out of the broad markets recovery today and it finished off 0.7%.  Under normal circumstances this would be a red flag, but we might give AAPL the benefit of the doubt today simply because it is the most widely held stock and month-end window-dressing could be part of today’s weakness.  AAPL has rallied a good ways from the November 16th low and broad market weakness could push the stock down again.  Hold off buying AAPL for the time being because you might get a better opportunity over the next couple weeks.

How did I do?

SCORECARD

Looking back at recent calls from CrackedMarket:

November 26th, 2012  “The trend is lower and the trend is more likely to continue than reverse, so we should plan for further weakness.  But at the same time, bears are getting pretty aggressive and we might see a short-squeeze thrown in before heading lower just to keep things entertaining.  The market doesn’t like to be predictable and a short-squeeze before plunging lower would zing both sides and humiliate everyone equally.

At this point I am looking for a plunge lower on gigantic volume to signal this correction is bottoming.  I would be reluctant to buy a rebound from this level without a huge selloff.  Lacking that, the rally won’t have the ammunition and sentiment necessary to sustain a move higher.  The market rises on fear and we need to scare everyone to get this rally going.  The only exception I would consider is if the market traded strong for four or more days.  I could get on board with that kind of strength, but that rally wouldn’t have the same upside potential as a market that had a decisive shakeout.”

Stay safe

 Posted by at 10:54 pm on November 30, 2012
Nov 302012
 

S&P500 daily @ 12:36 EST

Markets trading sideways today as the market is looking for direction.  The recent rally used up a lot of the bull’s ammunition and we should be on the lookout for reinvigorated bears to take back some of those gains.

MARKET BEHAVIOR

Stocks are trading modestly lower this morning.  There is not any big new and the market is digesting recent gains.

MARKET SENTIMENT

We’ve come a long way from the panic driven selloff to 1350 where everyone expected the world to implode between Obama’s reelection and the impending Fiscal Plunge.  In a couple weeks we went from the world ending to everything is going to work itself out just fine.  Funny how bipolar the markets can be.  While most people are frustrated with this behavior, the savvy trader exploits these emotions for quick profits.

Right now the market is approaching complacency, anticipating the two parties will work this deal out.  It is also assuming a plunge off the Fiscal Cliff might not be such a scary thing because the ‘Cliff’ really is a gentle bunny-hill that takes a full year to fall down.  The thinking is that even if we fall off the cliff, there will be plenty of time to continue negotiations and retroactively unwind the any tax and spending implications.

And while that analysis is spot on, it assumes the market will be perfectly rational when the financial press starts screaming we are about to fall off the cliff.  What we have here isn’t a serious structural problem, but a one of irrational fear.  And that is exactly what I am hoping for.  It is impossible to consistently make money off of a rational and efficient market, we need emotional market cracks to exploit and the a breakdown in talks between Democrats and Republicans will do that.

Last week the two parties were open to compromise, but that was an unspecified compromise.  Now that both sides are getting into actual numbers, they are realizing just how far apart they really are and neither side is willing to compromise enough to meet the other side.  It will happen eventually, I have no doubt about that, but each side is going to follow the negotiation handbook first and that includes making unreasonable demands and walking away.  We are on the verge of this unreasonable demands and walking away part and that will no doubt spook the market, letting the air out of this optimistic rally.

TRADING OPPORTUNITIES

It is a given these negotiations will blow up at some point, the question is when.  Will it be this weekend?  Will it be closer to the deadline?  Or are both sides so sensitive and considerate of the stock market that they will work together and push through a deal without all the bickering.  Ha, ya right!

There is some sizable downside risk in the near-term for the trader, but for the investor this will just  be a blip it should be easy to hold through.

The experienced and savvy trader can look for a good shorting entry point.  There is risk of one more short squeeze if we push through the 50dma on more conciliatory talks out of Washington.  On the other side there is the profit potential of a 30+ point slide lower as talks breakdown. At this point it is up to the individual trader to decide how much risk they are willing to accept and if they want to get in early or take the safer route and get in a little late.

For the investor, get your wish-list out and wait for the inevitable breakdown and let prices fall to more attractive levels.

INDIVIDUAL STOCKS

Everyone’s favorite AAPL is feeling the broad market’s weakness but at a rate 3.5x the market, down 0.7% to the markets 0.2%.  AAPL is surprisingly volatile for the most valuable company in the world.  Given the high-beta trade of AAPL, it no longer makes for a safe-haven in turbulent markets and wary investors should look for other places to hide their cash.  But beta cuts both ways and AAPL will be an attractive buy when the market bounces back.

How did I do?

SCORECARD

Looking back at past ideas and commentary from CrackedMarket:

November 1st, 2012  “Last week I mentioned the best way to humiliate everyone would be to trigger a short-squeeze before turning lower and falling under 1400.  We are halfway there with today’s short-squeeze.”

Stay safe

 Posted by at 1:20 pm on November 30, 2012
Nov 302012
 

S&P500 daily at end of day

Markets notched a new high for the rally as we approached the 50dma.  Bears are becoming an endangered species as the bulls continue running them off.  But one of the more powerful paradoxes in the markets is the smaller a group gets, the stronger they become.  Expect the remaining bears to make themselves herd in coming days.

MARKET BEHAVIOR

The market finally cleared 1410 and rose to the 50dma before settling back to 1415.  Volume was average and the masses were not rushing to buy this breakout.

Boehner caused a dip in early trade during a press conference when he said the sides were not close to a deal.    Stocks have come a long way in a couple of weeks as optimism of an imminent deal boiled over, but is this time for the pendulum of sentiment to swing back the other way?

MARKET SENTIMENT

Stocks have been rallying nonstop regardless of the news.  Bad news might cause stocks to sell off momentarily, but within an hour they rally back.  That’s what happened with Reed’s comments a couple of days ago and Boehner’s comments today.  This is a Teflon market as it shakes off anything and everything.  Does that make it a safe time to buy, or is the perceived safety making it even more dangerous?

Bears have gotten chased out for the umpteenth time and are starting to get discouraged.  Markets will often feign a reversal a couple of times before actually going through with it.  Given the recent whipsaws, we are getting close to that real reversal.  Many of the buyers have bought and most of the shorts have been squeezed out.  Without a new catalyst, we will run out of buyers shortly.  There might be enough gas in the tank for one push higher through the 50dma, but don’t expect our politicians to pretend to get along for much longer.

TRADING OPPORTUNITIES

Maybe we’ll poke our head above the 50dma tomorrow, or maybe we’ll finally breakdown.  There has been a lot of hope built in to this rally that the Fiscal Cliff will be resolved early.  But this is nothing more than wishful thinking, as anyone who regularly follows national politics will tell you.  These negotiations will get far worse before they get better and the rhetoric will only get louder as both sides try to court public opinion.

This is a good time to lighten up on stocks because not much upside remains without a definitive Fiscal Cliff deal.  At the same time there is plenty of downside risk if talks breakdown.  Friday might be a good day to try out a short because the weekend will give extra time for some politician to stick his foot in his mouth and wreck the fragile hope something constructive will come out of Washington.

INDIVIDUAL STOCKS

AAPL is riding along on the Fiscal Cliff rollercoaster like everything else in the market, albeit with a little more beta.  There is hope AAPL will declare a special dividend because of the impending tax changes, but I wouldn’t hold my breath on that one.

How did I do?

SCORECARD

This segment recaps past blog posts to see how I did.

November 5th, 2012 “Given the pervasive hope for a Romney win, especially among retail traders bamboozled by the media, creates an opportunity for a trade.  We could easily see a selloff after an Obama reelection if emotional traders dump shares due to an irrational expectation Obama will wreck this country.  That selling will climax quickly and create a great entry point for the trader who understands politics, how the markets work, and supply and demand.  Within a couple of days everyone who wants to pull their money out of equities because of Obama’s win will have done so, meaning all the sellers have sold.  At that point supply dries up and the market rallies.”

Stay safe

 Posted by at 12:43 am on November 30, 2012
Nov 292012
 

S&P500 daily at 12:55 EST

AM Update

Bears tried again to break this market but this rally is stronger than most expect.  But don’t let this support lull us into complacency.  Each failed breakdown brings us one step closer to the one that sticks.  As an added bonus, at the end of this post I highlighted some of my analysis from a couple weeks ago.

MARKET BEHAVIOR

Markets opened higher and traded up to the 50dma.  Then Boehner held a press conference, spooking the market and it gave back all those gains in a matter of seconds.  But like we’ve seen over the last couple weeks, the market bounced back from the initial knee-jerk reaction.

As seen from recent price action, the market remains emotional and we should anticipate elevated volatility in the coming weeks. But this is a good thing; a perfectly rational market is an efficient market.  It is these emotional swings that present us with the best profit opportunities.  Other people’s pain is our gain.

MARKET SENTIMENT

I hear a lot of traders complain that politicians are driving this market.  But the truth is only supply and demand can move markets.  Politicians are not moving markets, emotional traders hanging on every utterance in DC is what is causing these wild swings. If traders don’t like how the market is behaving, they only have to go as far as the closest mirror to see exactly who is responsible.

A couple of days ago it was Reed’s fault the market sold off.  Today it was Boehner’s.  The truth is it doesn’t matter.  Bears were looking for an excuse to lean into the market, the got it, and they tried their hardest to break this market.  But much to their disappointment, no one else followed their lead and the market bounced back.

But with each failed breakdown, we are that much closer to the one that will really work.  So rather than grow increasingly complacent with each rebound, we need to grow more suspicious.

TRADING OPPORTUNITIES

Lighten up long positions and get ready for the short that is getting closer by the day.

INDIVIDUAL STOCKS

AAPL is holding up nicely along side the broad markets.  The nonstop selloff has been abated, but it needs to rally a few dollars more to retake the widely watched 200dma.  But at this point the ‘death-cross’ is all but inevitable as the 50dma is quickly racing toward the 200dma.  While a lot of people will make not of this, it is a trailing indicator and it is really late to this party.  More than a selling signal, any weakness on the ‘death-cross’ could be a buying opportunity.

How did I do?

SCORECARD

I’ve been sharing a lot of ideas on this blog and I want to start this scorecard feature to highlight my successes and failures.

Nov 15th 2012  “The selloff has coiled the spring for an upside move pretty darn tight and the smallest bit of good news is bound to set of a gigantic bear trap.  On the other side, a huge number of skittish sellers has already sold, meaning the  potential supply is dwindling by the day.  This is setting up for a fairly asymmetrical trade where the upside potential is larger than the downside risk.  There is no reason to jump out in front of this meat grinder, but wait patiently for the right opportunity to snap up heavily discounted shares from emotional sellers and their pain will be your gain.”

Stay safe

 Posted by at 1:05 pm on November 29, 2012
Nov 292012
 

S&P500 daily at end of day

Bears got taken to the woodshed today were bloodied yet again.  Many of the value investors who were accumulating shares over the last few weeks are comfortable and confident with their positions and their discipline prevented a wider emotional selloff.  The selloff is coming, just not yet.

MARKET BEHAVIOR

It was a big day in the markets with a 25-point swing between the high and low.  In the first hour of trade it looked like the market was breaking down, but the selloff ended just as quick and the subsequent rally continued through the day.  We finished higher by 0.8% and regained the highs of this recent rally.

MARKET SENTIMENT

It was a bad day to be short and this was clearly a bear trap that snared a lot of pessimists.  As I mentioned on Tuesday, this was the wrong time to be short the market.  There is nothing wrong with taking profits here, but it is a little early to be jumping on the short bandwagon.

Volume was just a hair under average and similar to what we saw on Tuesday.  The relatively modest volume showed that while this was a wild ride, not a lot of people were sucked in by the apparent breakdown or subsequent reversal.  This further reinforces the idea that many of the buyers over the last few weeks are confident and prepared to hold through some volatility.  Their willingness to sit tight in the face of selling pressure is what constrained supply and lead to the bounce.

Yesterday I talked about how all the selloffs in the last 5 years were great buying opportunities.  Obviously this isn’t always the case, so how do we tell the difference between a buyable dip and the start of a bear market?  It all comes down to what other traders think.  Right now everyone is obsessed with the Fiscal Cliff and all the other negative headlines out there.  It is this widespread negativity that shows we are still in a bull market.

Compare this to the spring of 2008 after the market already sold off from the 2007 highs.  Even then complacency was the norm as everyone was used to easy money and viewed the market as an attractive buy.  At the time Obama and Hillary were fighting for the Democratic nomination and in the process were trashing Bush and the economy.  Investors took a lot of offense to Hillary and Obama suggesting we were entering a recession.  In fact the candidates were so widely criticized for spooking people that they started referring to it as the “R-word” so everyone would back off.  Obviously Hillary and Obama were simply making political hay and had no idea what was about to unfold, but that obliviousness by everyone is exactly what set the stage for a major selloff.

The question we have to ask in the present day is if traders are complacent and oblivious to the risks in front of us.  Not only are investors in tune with the risks in the world, so is the average Joe.  This doesn’t mean we won’t have volatility and selloffs, but those selloffs are buying opportunities, not a time to head for the hills.  Given how badly the 2008 selloff damaged the average investor’s psyche, I think it will be years before we see widespread complacency lead to a major bear market.

TRADING OPPORTUNITIES

Given the strong reversal today, the 50dma is within easy reach and the bigger question is whether we will break through it or hit our heads.  The market is sensitive to headlines and the building expectations of a Fiscal Cliff resolution are setting the stage for disappointment as negotiations drag on.  While the Fiscal Cliff is not as big of a deal as other crisis in recent memory, it will be enough to spook emotional traders and present an attractive profit opportunity for a savvy trader willing to go against the grain.

In the near-term look for the market to rally a bit more before pulling back.  The selloff will be swift and decisive, but it will find support after breaking the 200dma and 1400.  I’m not a psychic and can’t predict if we’ll make new lows or not.  But if we take our profits early, it really doesn’t matter.  The more important trade will be buying this Fiscal Cliff selloff and getting ready for the inevitable bounce.

INDIVIDUAL STOCKS

AAPL is trading sideways and consolidating recent gains after bouncing off of the $500 level.  What was the must have stock became the must short stock.  It worked if you were daring enough to get in, but this stock is too much of a darling to not bounce hard when the price declines this much.  No matter what the fundamentals show, many traders are infatuated with AAPL and will buy it all the way down.

As for the fundamentals, I have yet to see a young person with an iPhone5.  The Samsung Galaxy SIII is the new cool kid on the block and I’ve seen far more of those than iPhone5s.  No doubt there are a lot of soccer moms who still lust for an iPhone5, but the days of undisputed rule are coming to an end.  AAPL makes a great product, but expect competition to hammer market share and profit margins in coming years.  Of course this is a longer viewed prognosis and in the near-term the emotional volatility surrounding AAPL will make for some great swing trading.

Stay safe

 Posted by at 12:01 am on November 29, 2012