Feb 282013
 
S&P500 daily at end of day

S&P500 daily at end of day

PM Update

Stocks held yesterday’s big gains, but late selling on sequester worries is giving traders second thoughts.

MARKET BEHAVIOR

Stocks traded higher through the day but fell apart in the last two-hours, finishing near flat.

MARKET SENTIMENT

The market cracked after the Senate rejected two sequester proposals, but as worrisome as the last hour looked, the market still finished near Wednesday’s highs.  No doubt selling will continue Friday as the automatic sequester cuts kick in, but most of the weak holders already bailed in the recent dip, meaning a large part of that nervous selling already happened.  Everyone knows sequester is coming and most have so little confidence in our politicians that a breakdown in negotiations will surprise few.

Sequester gridlock could weaken the market, but it will come from a lack of willing buyers, not a flood of sellers.  Anyone who can’t stomach volatility sold earlier this week.  Remaining holders are more calm and confident and won’t stampede for the exits at the first signs of trouble.

Sequester cuts or not, the economy will continue improving no matter what happens and the stock market will quickly move past this drama.  Obviously cuts in govt spending won’t help the employment situation and it will delay the recovery, but we will get past it and any dip will be another buying opportunity.  If a financial meltdown, 10% unemployment, and European Contagion couldn’t kill this bull, what are the chances some govt spending cuts will?

TRADING OPPORTUNITIES

Expected Outcome:
It will be interesting to see how weak the market is on Friday if a deal fails to materialize.  Will it be a 15-point dip or a 50-point plunge?  My money is on the former, but that is what stop-losses are for.  Most of the paranoid are already out of the market so I don’t expect a mad rush for the exits.  Between unemployment, money printing, deficit spending, stimulus, Obama’s reelection, the Fiscal Cliff, Debt Ceiling, and now the Sequester, anyone who thinks these things are a big deal is not in this market and their opinion no longer pressures market prices.

If sellers keep their cool, the future of this market rests in buyers’ hands.  Look for initial reluctance, but that hesitation will fade once the world holds together and life goes on.  The key level of support is 1500 and the rally remains intact as long as we hold this level. There are just a few weeks left in this quarter and the pressure will be on for underperforming money managers to catch this market.  Expect their buying to fuel the next leg of this rally.

Alternate Outcome:
If the Sequester negotiations get particularly nasty and entrenched, this could lead to more serious govt funding issues down the road (debt ceiling).  As we saw last week, the herd can panic on seemingly benign news from halfway around the world.  A sequester impasse could trigger another stampede for the exits if everyone starts selling just because everyone else is selling.  I don’t expect this, but we have to be prepared and stick with our stop-losses just incase.

INDIVIDUAL STOCKS

AAPL is barely holding $440 and broad market weakness will send it to a new low.  The stock would have bounced already if it was unsustainably over-sold, meaning it’s not oversold yet.   Stocks often bottom in a ‘V’ and if AAPL is going to do that, it needs to form the left side of the ‘V’.  Most likely there is one last flush lower before this stock will finally demoralize the hopeful and find a bottom.  Any long-term holder needs to be mentally prepared to sit through this kind of volatility.  The worst thing will be riding this stock all the way down, only to bail out just before it finally rebounds.

Stay safe

 Posted by at 10:29 pm on February 28, 2013
Feb 282013
 
S&P500 daily at 1:12 EST

S&P500 daily at 1:12 EST

AM Update

MARKET BEHAVIOR

A quiet and uneventful morning after seven consecutive sessions of heart-pounding volatility.

MARKET SENTIMENT

Neither buyers nor sellers showed up in force and the market is digesting recent gains.  The last week-and-a-half humiliated bulls and bears alike as it duped many into making impulsive and ill-timed trades.  At present everyone is too shell-shocked and hesitant to make a decisive move, but this calm is an important step in regaining composure.

When in doubt, stick with the trend.  The high-volume selling purged all complacency and much of the fat that accumulated since the start of the year.  Technically speaking, the dip under 1500 cleared the minefield of automatic stop-losses, making that area far less dangerous to the market.  But chances are we won’t test this area again since all the sellers under 1500 now need to figure out how to get back in and their buying will prop up any potential dips.

When the market marches ahead, those left behind hope for a pullback.  We had that pullback this week, but how many jumped on the opportunity to get in?  My guess is not many.  In fact many of the holders who were lucky enough to be in the market were spooked out by the dip under 1500.  Now both of these groups need to figure out how to get back in and their chasing is the fuel that will keep this market moving higher.

Buying is only half the equation and we also need to consider sellers.  Anyone who held through recent volatility is feeling pretty good about themselves right now.  Maybe they held because of discipline, or they failed to sell because they froze under pressure, but either way they are congratulating themselves for sticking it out.  This affirmation and positive reinforcement makes them holders less likely to sell the next dip.  Add to this to all the buyers looking to get in and we have a recipe for higher prices.  At least until we run out of buyers…….

TRADING OPPORTUNITIES

Expected Outcome:
We might see some weakness if sequester negotiations bog down, but most holders expect this and are growing immune to the gridlock in DC.  The more interesting thing will be watching the post-sequester trade.  Will the market spike on a deal?  Is the market already expecting the deal and will selloff on the news?  Can it do both?

An interesting trade would be a surge higher on compromise out of DC, but if the buying comes in too fast, it could build the head of the head-and-shoulders.  A one-way run up to  1550 or 1575 should be looked at with a healthy dose of skepticism.  On the other hand, modest, measured, and earned gains are sustainable and indicate there is more left in this rally.  The recent dip to the 50dma refreshed and renewed the rally meaning we might only be halfway through this move.

Alternate Outcome:
After the Fiscal Cliff and Debt Ceiling scares and last second compromises, the market might be looking past the sequester expecting a deal is all certain.  The risk is if politicians say enough is enough and refuse to compromise any further, using a govt shutdown to prove a point.  Its happened before and the uncertainty will roil the markets.  While certainly a possibility, our politicians care more about their reputation than doing the right thing.  Look for them to be politically expedient and leave the hard work for someone else down the road.

AAPL daily at 1:13 EST

AAPL daily at 1:13 EST

INDIVIDUAL STOCKS

AAPL is finding support around $445 and is resisting a selloff after an uninspiring investor day yesterday.    $450 has been near-term resistance.  Breaking above and holding this level would be supportive of a swing-trade higher.  The stock already missed the opportunity for a quick rebound and any long-term investors should expect a 12 to 18 month.  In the meantime there is still a lot of money to be made swing-trading or selling options.  Just because this isn’t a set-it-and-forget it trade anymore doesn’t mean we should stop paying attention to it.

Stay safe

 Posted by at 11:16 am on February 28, 2013
Feb 272013
 
S&P500 daily at end of day

S&P500 daily at end of day

PM Update

The rally is back on after stocks decisively recaptured 1500 and closed above 1515.  But on one of the biggest days of the year AAPL was MIA as investors were underwhelmed by investor day.

MARKET BEHAVIOR

Stocks had a good day, recovering most of Monday’s plunge.  Volume was average, but lower than the recent down-days.

MARKET SENTIMENT

Amazing the difference a couple of days make.  Monday afternoon markets were collapsing and bulls were on the menu.  Today the rally is back on and bears are in the fryer.  This is a very impulsive market and anyone listening to his gut is getting torn to shreds.  There was a ton of money to be made, but it took a cool head and a plan, something in short supply when the herd is stampeding one way or another.

Bears took solace from today’s light-volume and warn of lack of conviction, but like anything in the markets, there are two ways to look at it.  Stocks move on supply and demand, nothing more, nothing less.  Within supply and demand, we have 4 constituents that move prices; aggressive buyers, aggressive sellers, reluctant buyers, and reluctant sellers.  Most people intuitively understand the first two where people yell “buy, buy, buy” or “sell, sell, sell”.  This excitability is exhibited during high-volume moves.  But the market also moves on low-volume too.  This is when holders are unwilling to part with their stock at present levels, or buyers are unwilling pay current prices.  Today’s low-volume rally showed unwillingness from holder to let go of their shares.  This reluctance to sell limited supply and resulting scarcity drove prices sharply higher.

The last few days of selling flushed out many weak holders and the buyers who stepped in acknowledged the risk and are more comfortable sitting through some volatility.  Because these new holders are less likely to get spooked out of their positions, their resolve takes out supply and puts a floor under the market.  This is exactly what happened Tuesday.  Today’s 20-point surge further reinforced this phenomena as holders were rewarded for sitting through the dip.  Combine these factors and we have a core group of holders that is far less likely to sell into future volatility.  The interesting thing is this reluctance to sell volatility actually eliminates volatility because supply no longer floods the market.

As we’ve been discussing for weeks now, this market is not going to fall apart on news.  We’ve seen quick dips on the Fiscal Cliff, negative GDP, and now turmoil in Europe, but every time it was a buying opportunity.  We have sequester around the corner, but this is widely telegraphed and while it won’t be pretty, no politician wants to go down with the ship and it will get taken care of.  Anything short of a complete breakdown will just be a sideshow and the market has already priced in some delay.

If this market won’t fall apart on bad news, what’s left?  Running out of buyers.  As more people buy this rally, there are fewer left to buy it.  Once everyone is on the rally bandwagon, we no longer have new people to keep pushing prices higher.  This week’s decisive rebound went a long way to convincing people that the only way to trade this market is from the long side.  And while they are right, they are also late.

TRADING OPPORTUNITIES

Expected Outcome:
Stick with what is working.  The market clearly wants to go higher and look for new highs in coming weeks.  Today’s 20-point rally was huge and a modest pullback to digest these gains should be expected.  But given the decisiveness of this rebound, a dip back under 1500 is a serious failure and most likely signals the end of the rally.

This morning’s break above 1500 was obviously a good entry point, but for those that missed it, it is harder to get in now the market has moved this far.  Look for a dip back to 1510 and use that as an entry point.  No matter where you got it, a stop-loss just under 1500 is a good idea.

The next question is how much further will this go.  Barring a meltdown, 1530 is all but a done deal and 1550 is highly likely.  New all-time highs at 1575 is also on the table, but we need to see the market move ahead sustainably.  If the prices race ahead without taking a break, that will signal exhaustion and the end of this rally as it sucks in the last of the available buyers.  But a more measured and deliberate rally that takes its time is more sustainable and could carry us as high as 1600.  We will revisit the price-action and sentiment at 1550 to determine if we should hang on or take profits.

Alternate Outcome:
The market is an equal opportunity humiliator, zinging both bulls and bears over recent days.  While bulls have the upper hand, this could be one last bull-trap before collapsing on sequester worries.  In markets like these, we have two options, staying on the sidelines, or picking sides.  I’m on the rally side, but recognize that I could be wrong and will use a stop-loss under 1500 to get me out.

AAPL daily at end of day

AAPL daily at end of day

INDIVIDUAL STOCKS

AAPL sold off on one of the strongest market days of the year when Cook failed to impress traders at investor day.  There were rumors of stock splits and hopes of giving money to shareholders, but the wishful left empty-handed.  From a sentiment point of view, it is interesting watching the stock respond so strongly to rumors.  A few weeks ago it rallied to $485 before Cook spoke at a conference.  Yesterday it rallied $10 in minutes on rumors of a 10 for 1 stock split.  This reeks of desperation as bulls grasp at straws and jump on any rumor that comes around.  This shows there is still too much hope left in this stock.  When all the faithful already own the company, who is left to buy?

Stay safe

 Posted by at 10:12 pm on February 27, 2013
Feb 272013
 
S&P500 daily at 1:11 EST

S&P500 daily at 1:11 EST

AM Update

Bears are humiliated today as the break above 1510 sent shorts running for cover.  AAPL’s investor day is uninspiring and the stock is sagging as another catalyst came and went.

MARKET BEHAVIOR

Stocks broke above 1500 and continued past 1510 in morning trade.  Runaway selling on Monday gave way to binge buying.

MARKET SENTIMENT

Two-days ago the world was ending and now it is saved.  Try as they will, fundamentalists, technicians, and the financial press cannot explain away these recent swings using headlines, data, or charts.  There is only one thing that moves markets, supply and demand.  Herd psychology is taking over as people make trading decisions exclusively based on what other people are doing.  Normal rules do not apply in times like these and is why it is so important to understand what people think, how they are positioned, and why they are doing what they are doing.

Shorts and breakout buyers are chasing this market higher and while their buying is not sustainable, the rally is sending a wave of relief through the market.  Traders who held the dip are feeling better and anyone who sold the dip is suffering a bout of regret.  The obvious short was anything but and bears have humble pie all over their face.

Reclaiming 1500 and 1510 is significant.  While volatility will persist, this rebound shows bears have less sway over the market than most thought.  The recent rebound further diminish their credibility and traders are becoming more comfortable holding this market.  But in one of the most ironic paradoxes of the market, the smaller a group, the more powerful it becomes.  As the bear contingent shrinks we need to become more fearful them.  The more bullish people become, the greater the risk of running out of new buyers becomes.  This is the psychology and structural trade that leads to double-tops and head-and-shoulders patterns.  The first breakdown typically fails and bounces higher because too much cynicism and doubt remains.  With each successful bounce, the rally bandwagon becomes more and more crowded, eventually succumbing to its own success when everyone is bullish.

TRADING OPPORTUNITIES

Expected Outcome:
This market is showing how important it is to trade proactively, not reactively.  There was a lot of money to be made using defined buy-points, stop-losses, and taking worthwhile profits.  Unfortunately for many, this has been a horrible couple days as they bought the rally and sold the dip.

The market reclaimed 1500 and has a comfortable cushion above this key support level.  The obvious stop-loss is 1495 and anyone who overcame their fear and bought the  break above 1500 is doing pretty well right now.  There is no reason to become complacent here, but so it looks like higher-highs are in our future.

Alternate Outcome:
Until the market makes a higher-high, the risk of a suckers rally is real.  Markets often bounce on their way lower, sucking in bottom-pickers and flushing out late shorts.  Any bull needs to acknowledge they can be wrong and this is where stop-losses are worth their weight in gold.  Success in the market isn’t about how much we make when we are right, but how little we lose when wrong.

AAPL daily at 1:11 EST

AAPL daily at 1:11 EST

INDIVIDUAL STOCKS

AAPL is down 1.5% halfway through its investor day as the market has been underwhelmed by what it heard.  There is still time to surprise the market in the Q&A, but if there was real meat to this story, Cook would have presented that early.  With another catalyst come and gone, look for the stock to resume its slide lower.  There are still too many hopeful holders in this stock for it to make a meaningful rebound without an insanely cool new product that will reinvent the company.  The iPhone6 or another me-too streaming TV device just isn’t going to do it.

LNKD is squeezing bears again as something that’s gone too-far, too-fast keeps going.

Stay safe

 Posted by at 11:16 am on February 27, 2013
Feb 262013
 
S&P500 daily at end of day

S&P500 daily at end of day

PM Update

The market took a break after yesterday’s major slide and AAPL bounced ahead of Wednesday’s investor day.

MARKET BEHAVIOR

Stocks reclaimed a portion of yesterday’s selloff, but remain under 1500.  Volume was just 1% lower than yesterday’s plunge, showing a fair number of shares changed hands.  The 0.6% bounce was enough to recover the final minutes of Monday’s panic selling, but the market refused to climb above 1500, an obvious technical level for anyone who even casually follows stock charts.

MARKET SENTIMENT

Buyable dip or dead-cat bounce?  That’s the million-dollar question.  The market bounced off 1500 half a dozen times over the last few weeks, does it have one last helping hand for the market, or will former support turn into resistance?

1500 is the line in the sand.  Rallying above this key level will trigger a short-squeeze and send the market higher on a wave of short covering.  Momentum traders will jump on the bandwagon, helping propel the market through 1510.  Recovering the majority of the selloff will put peoples’ minds at ease and the rally continues.  Or the market bumps its head on 1500 and the selloff continues.

TRADING OPPORTUNITIES

Expected Outcome:
I still think the market has new highs in it, but what I think doesn’t matter and we need to follow the market’s lead.  A break above 1500 is buyable and a break below 1475 is shortable.  In the meantime, look for the market to oscillate between these levels.  It‘s entirely possible we see a third-wave of selling take us to 1475 before we finally bottom, reclaim 1500, and make new highs.  The obvious breakout trade is often too easy, so anticipate a head-fake or two along the way.

Take this time to plan your trade.  Will you buy a break above 1500?  What will your stop-loss be?  What profit target are you looking for?  Will you short resistance at 1500?  What stop will you use?  What is your profit target?  What about a break below 1475?  Plan your trade and trade your plan.

Alternate Outcome:

The expected trade is an eventual rebound to new highs, but this market could easily be topping.  The bears have reams of data showing how horrible the world is and they could be right.  We trade with stop-losses because it is impossible to be right every time.  Success isn’t about how much money we make when we are right, but how little we lose when we are wrong.

AAPL daily at end of day

AAPL daily at end of day

INDIVIDUAL STOCKS

Finally something new to talk about with AAPL.  The stock popped $10 after rumors surfaced that Cook will announce a 10 for 1 stock split at Wednesday’s investor day.  I’m not sure why people are so excited about this; maybe they are just bad at math.  When I was a kid, my dad was teaching my brother and I about money.  He offered to trade my 6-year-old brother’s $1 allowance for three-quarters.  My brother thought more was obviously better and took my dad’s offer.  That’s what I think of when people get excited about stock splits.

People will argue $45 is far more accessible than $450 and it will let little guys buy the stock, adding to demand, and pushing prices higher.  Of course on the other side, $450 is far more prestigious and impressive than $45.  Of all the exciting and innovative tech companies out there, how many have a stock price less than $100?  If AAPL is desperate enough to cater to the 20-year-old investor demographic, that will be a major turning point in a once proud company.

I have little doubt the stock-split crowd will bid up a split, but that is a selling opportunity, not a fundamental catalyst.   Far more interesting will be details of what AAPL plans to do with its cash hoard, but since the company has a history of under delivering in this regard, expect the market to be disappointed yet again.

Investors are waiting for more pioneering innovation out of AAPL.  The stock is lagging because competition is catching up, and in some cases exceeding AAPL.  Stock splits and dividends ignore the real reason AAPL’s stock is lagging.  Without addressing the root cause, expect the lagging to continue.

Stay safe

 Posted by at 9:31 pm on February 26, 2013