Dec 312012
 
S&P500 daily at end of day

S&P500 daily at end of day

PM Update

What was the least expected price action today?  That is exactly what we got.  Markets don’t move on fundamentals or technicals, they move on supply and demand.  Run out of sellers and markets rally, cliff or no cliff.

MARKET BEHAVIOR

Stocks were up 1.7% on the final day of the year.  The market opened lower, but rallied through the day on Fiscal Cliff hopes.  This put the hurt on bears as the obvious Fiscal Cliff collapse turned into a monster rally instead.

MARKET SENTIMENT

A lot of traders were positioned for a Fiscal Cliff collapse and this rally caught them by surprise.  People pay too much attention to the news and not enough to how other traders are positioned.  Deal or no-deal, the Fiscal Cliff is a drag on the economy, but if you trade the fundamental story, you would be on the wrong side of this trade.  This is because markets respond to supply and demand, not fundamentals or technicals.  Everyone saw the Fiscal Cliff coming from a mile away and sold ahead of it.  There is no supply of new sellers remaining, thus we rallied in spite of the headlines.

Speaking of headlines, lawmakers have a couple more hours to strike a deal and avert the cliff, but this focusing on the wrong thing.  We are obsessing over “deal or no-deal”, but this isn’t a binary event.  A deal doesn’t save us and no-deal doesn’t ruin us, but that is the way people are trading it.  Once we are past the deal/no-deal hoopla, the market will move its attention to something else.  Maybe that is the ramifications of the compromise, maybe it is Europe, or maybe something entirely new.  Remember every ECB meeting or employment report from last year that was supposed to “make or break the market”?  The Fiscal Cliff will be just like that, hours later and it will be ancient history.

TRADING OPPORTUNITIES

Expected Outcome:
Most of the selling already happened and the high probability trade is to the upside.  All the sellers have sold and supply is drying up.

Alternate Outcome:
Within hours of the New Year and we still don’t have a deal.  When markets open on Wednesday, that could pressure prices, especially since we had a strong short squeeze Monday.  But even renewed weakness presents a buying opportunity because the market is so overly pessimistic and most of the weak hands have already sold.

AAPL daily at end of day

AAPL daily at end of day

INDIVIDUAL STOCKS

The strength of the indexes was only out-shined by the monster run AAPL had, up nearly 4.5%.  This stock is finding buyers and running out of sellers, a recipe for higher prices.  It won’t be a smooth ride because there is a lot of overhead supply to work through, but the stock has probably seen the lowest of the lows.  I’m not an AAPL bull by any stretch and think they will see real competition from Samsung and Microsoft next year, but the stock was oversold and presents a great buying opportunity as we will probably see $650 this year, maybe even before summer.

Stay safe

 Posted by at 6:32 pm on December 31, 2012
Dec 282012
 

S&P500 daily at 2:56 EST

AM Update

Churning sideways at 1410, but the asymmetric trade remains to the upside as most traders fearing the Fiscal Cliff already sold and holders are willing to hold in the face of this risk.

MARKET BEHAVIOR

Markets are down a half-percent in light trade as everyone awaits developments out of Washington.  We bounced off 1400 yesterday and are holding around 1410 today.  So far 1400 is the line in the sand, break below this and we could see a wave of technical and stop-loss selling hit the markets, but so far bulls have successfully defended this key level.

MARKET SENTIMENT

The Fiscal Cliff continues dominating headlines at the expense of everything else.  Yesterday’s bounce off 1400 started when the House announced it was reconvening on the 30th.  While there is little hope a deal will be reached over the next few days, this development was enough to squeeze bears out of the market.  This hints at the upside potential if good news comes out.  On the other side, most traders are already resigned to falling off the cliff.  Those afraid of headlines already sold ahead of the 31st expiration, leaving few sellers still in the market to actually sell the news.  If anyone was convinced we were headed over the cliff and this would lead to a massive selloff, who wouldn’t sell ahead of it?   These pessimistic expectations and positioning create an asymmetrical trade to the upside since most of the downside has already been realized.  This isn’t to say we cannot see further near-term weakness.  While we won’t see a massive wave of selling, a dearth of buying can also pressure prices, but the upside potential at this juncture is greater than the downside.  Success n the markets it isn’t about predicting the future, but knowing the probabilities of various outcomes and trading those when they are in your favor.

TRADING OPPORTUNITIES

Expected Outcome:
Most of the Fiscal Cliff selling has already happened, meaning we should only see modest weakness after the event, and might even see the market find support in a sell-the-rumor, buy-the-news phenomena.  While dysfunction in Washington is not a good thing,  once all the selling happens, supply dries up and the market has nowhere to go but higher.  Since this is such a well telegraphed event, most of the Fiscal Cliff selling will happen ahead of time and the new crop of buyers are willing to hold through this volatility.  The ironic thing about stock holders expecting volatility is they eliminate volatility.  This is because confident holders don’t sell the headlines and that is all it takes to put a floor under the market.

Alternate Outcome:
Since we are so close to 1400 and all the stop-losses resting just below this technical support level, even modest weakness could drop the market to the point where it sets off a wave of autopilot selling. But while the avalanche might feel scary, it will find a floor not long after because the autopilot selling will climax fairly quickly when it isn’t followed up by real selling.  Many of the holders bought after the election and in the face of Fiscal Cliff headlines, meaning they have a longer-view of the market are harder to shakeout.  Their confidence in the future prospects will keep a bigger wave of selling at bay.

AAPL daily at 2:58 EST

INDIVIDUAL STOCKS

AAPL is holding near $510, giving traders another opportunity to jump in at the $500ish level.  Funny how when the stock is $550 or $600 people wish they bought at $500, but when it retreats back to $500, it is hard to pull the trigger because it looks like it is breaking down.  My experience is the hardest trades to make often work out and the easy trades blow up in my face.  If a stock seems too high, it keeps going higher; if only fools would buy it, it probably bottomed.  On the other side of the coin, if a rising stock is a sure thing, it is probably peaking and if a falling stock looks like a great buy, then it will probably continue lower.  And this isn’t just hyperbole, there is a lot of psychology and supply and demand dynamics that make this a very real phenomena that we can get into at some other time.

Stay safe

 Posted by at 12:59 pm on December 28, 2012
Dec 272012
 

S&P500 daily at 2:26 EST

AM Update

MARKET BEHAVIOR

Stocks are down for the 4th day and finally breached the 50dma.  Volume is light in the holiday shortened week, but volatility and uncertainty remain high because of the ongoing Fiscal Cliff debate in Washington.

MARKET SENTIMENT

Not many big money managers are interested in buying stocks this holiday week.  As we discussed last week, most senior decision makers are on vacation and the junior traders manning the desk don’t have the authority to make new buys and are just there to sell stock if we break key technical levels.  Today we find ourselves at two of these key levels, the 50dma and 1400.  Will stocks fall further as automatic sell orders are placed and value buyers are on vacation and not there to put a floor under the market?

There are few optimists remaining who think a Fiscal Cliff deal will happen before the end of the year.  Falling off the cliff is already baked in and we don’t need to fear a massive selloff when we officially go off the cliff next week.  It is so widely expected, anyone who fears the cliff already sold, limiting the amount of new selling to hit the market when it actually happens.  But while we won’t get hit with a wave of selling, lack of buying can also push prices lower and we could see further weakness until value buyers come back to work next week.

TRADING OPPORTUNITIES

Expected Outcome:
Most of the Fiscal Cliff fears are already baked in the market, meaning there is more upside than downside at this point.  Traders can wait for more weakness to develop, but don’t pile on the short-side expecting a plunge because most of the selloff has already happened.  Instead start looking for the next big opportunity on the long-side as the market moves past Fiscal Cliff worries.  Finding support at 1400 would signal a good time to buy stocks.  Buy the rebound instead of trying to catch the falling knife.  A dip under 1400 could trigger more selling before we finally bottom, so wait for the confirmation.

Alternate Outcome:
While a lot of the professional Fiscal Cliff selling has already taken place, the wildcard is an emotional selloff from 401k investors.  Will these less experienced investors hit the panic button when the January 1st headlines are screaming Fiscal Cliff collapse?  There is a chance we could see a repeat of the cascading post-election selloff, but that seems less likely because November’s selloff shook out most weak and emotional hands, leaving us primarily with holders that are less skittish in the face of uncertainty, hence the reason they are holding in the face of the Fiscal Cliff worries.

AAPL daily at 2:26 EST

INDIVIDUAL STOCKS

AAPL is making a move for the $500 level again on the back of broad market weakness.  Recent support at $500 might encourage more adventurous value investors to jump in at these levels.  As risky as it seems owning AAPL down here, this is the safest time to own AAPL in nearly a year.  AAPL has gone from everyone’s favorite stock to the favorite whipping boy with countless reasons not to own it.  The recent slide made it hard to remain positive on the stock, but this change in sentiment was inevitable given how bullish everyone has been for so long.  Can the stock slide under $500?  Absolutely, but buying AAPL at $500 is without a doubt safer than buying it at $700.  Keep an eye out for a material penetration under $500, but 10% risk to the downside and 20% opportunity to the upside sets up for a nice trade.

Stay safe

 Posted by at 12:29 pm on December 27, 2012
Dec 242012
 

S&P500 daily at 12:50 EST

AM Update

MARKET BEHAVIOR

Stocks are down fractionally on Christmas Eve as most buyers and sellers are taking the day off.  We are sitting at 1425, but we need to be wary of any dip under 1410 that would violate the recent bounce and 50dma.  This would trigger a wave of stop-losses clustered below these technical levels, further pressuring the market.

MARKET SENTIMENT

Friday’s selloff didn’t continue and overwhelm today’s light pre-holiday trade.  While we might see more weakness in coming days, don’t expect a major collapse.  All the bears who are pessimistic about this economic and political environment have leaned into this market with all their might and the best they coud manage was a 20 point decline.  The market also tried to shake out weak holders and but failed to induce many traders to bail on their positions.  Most of the holders in this market are willing to hold through the headline risk and that bodes well for the bull case.

News doesn’t drive markets, people trading stock does.  If bears are already out/short and holders are willing to hold through volatility, then markets defy gravity and negative headlines slide right off.  This description fits our current situation pretty well.  Going into next year how do things look?  We have all this headline risk and pessimism already priced into the market.  If we have already realized most of the downside, it doesn’t take a genius to figure out what the markets will do once we see a constructive resolution to these risks?

TRADING OPPORTUNITIES

Be ready to buy the rebound in the second half of this week.  We could see some initial weakness, so wait to buy on strength.  Shorts really need to get out-of-the-way of this market and should use weakness today or Wednesday morning to go flat.  Most people now anticipate us moving into the new year without a Fiscal Cliff deal, so don’t expect major selling when that widely expect event comes and goes.

INDIVIDUAL STOCKS

AAPL is up modestly in spite of broad market weakness. The low $500 range attracts buyers as we bounced off this level three-times already.  So far this has provided firm support for AAPL shares and is a key line in the sand going forward.  AAPL is buyable as long as we hold above this line.  Drop under $490 and we need to reevaluate.  I would largely discount selling due to another analyst downgrade or other opinion based analysis.  The only thing that would concern me is a material change in fundamental data out of the company in their upcoming earnings report.

Stay safe

 Posted by at 10:51 am on December 24, 2012
Dec 232012
 

S&P500 weekly at end of week

Look Ahead

MARKET BEHAVIOR

Markets were positive last week, but finished on a sour note after Friday’s selloff.  The big question is if the market will continue the weekly trend higher, extend Friday’s slide, or the third option, a bit of both, further weakness before rebounding higher.

MARKET SENTIMENT

The holiday-shortened week will see light volume as most big-money managers are on vacation.  Obviously these guys cannot closeout their positions before leaving, so to manage risk their only alternative is leaving stop-losses to protect their portfolio.  Some of these are electronic, others are junior traders stuck manning the desk through the holidays.  But while the junior traders have the authority to sell shares if the market hits predetermined stop-loss triggers, these young traders don’t have the same authority to initiate new buys.

What makes this noteworthy is it creates an imbalance with sell triggers piled around key technical levels but very upside catalysts where automatic buying will take place.  The light volume also increases the opportunity for volatility because smaller orders carry more weight and can move the market. It could make for an interesting week with a slight negative bias.  But often these holiday week moves are not fundamentally driven and do not stick once the decision makers return to work.

TRADING OPPORTUNITIES

The lack of massive selling last Friday on the Fiscal Cliff breakdown, shows the market is not spring-loaded to the downside.   This is encouraging news for bulls looking to buy this market.  We could see some carry over from Friday’s selloff, but barring panic induced selling, we are close to the bottom.  As I shared above, the holiday week could result in a negative bias, meaning we might wait to buy until the back half of the week to see how things develop.  We could easily see the market take off on light volume, but we could also see it plunge if stop-loss selling kicks in.  But either way expect the market to stall after the initial flurry of orders is filled.

I continue being constructive into next year as the market stops worrying about the Fiscal Cliff and a lot of this new money from special dividends and 2012 tax selling gets pumped back into equities.  Even longer-term there is huge upside potential as money starts flowing out of bonds and back into equities.

AAPL weekly at end of week

INDIVIDUAL STOCKS

AAPL is the exception where I expect there are many automatic buy-orders near the $500 level with big money itching to get back in the stock near these lows.  If there is weakness in the markets, we could see AAPL find a floor near $500 as junior traders are under orders from their bosses to buy any time AAPL dips to $500.  For those holding the name, this could provide some downside protection.  Of course breaking $490 and all bets are off and you’ll see a lot of stop-loss selling punish the stock.

Some people criticize my analysis because I lay out two different scenarios.  But the truth is I don’t have a crystal ball and I cannot know for certain what the market will do in the future.  I trade the higher probability, but even low probability events happen on a regular biases   I am always considering multiple outcomes so I am prepared for whatever the market throws at me and I know how to trade different situations.  In AAPL’s case, I expect to find support at $500 and the stock is buyable here, but dip under $490 and expect a wave of stop-loss selling to punish the stock.  How a person trades that cascade of selling depends on their timeframe and holding period.  But having a plan at $490 helps alleviate some of the fear and doubt that inevitably happens when a trade moves against us.

Stay safe

 Posted by at 9:04 pm on December 23, 2012