PM: What just happened?

PM Update

An interesting day in the market that gives us more questions than answers.  AAPL’s underperformance continues and AMZN defies logic and reason.

MARKET BEHAVIOR

Stocks set new highs and closed above 1550 for the first time since 2007.  Today was the sixth consecutive up-day and eighth out of nine, covering over 65-points in two-weeks.  Volume was modestly higher on a day when the employment report came in far above expectations.

MARKET SENTIMENT

It was a fascinating day and leaves us a complicated sentiment puzzle to figure out.   Stocks gaped up at the open on strong employment numbers, but it failed to trigger a short-squeeze or follow-on buying and stocks slid into the red by mid-morning.  After just a few minutes under Thursday’s close, the market found a bottom and ground higher through the day.  Volume was surprisingly average given the level of disagreement between optimists and pessimists.  We had a compelling new data point, but it failed to change many people’s mind and cause them to change their positions.

Lets breakdown what happened intraday to see if it gives us any insights into what people are thinking and how they are positioned.  The open gapped higher as a wave of buy-orders flooded the market in anticipation of a blowout day on the strong employment report.  Some was short-covering, others were headline traders, but within minutes this buying climaxed and the market reversed sharply, giving up 10-points in less than an hour.  This weakness on the heels of unexpectedly good news certainty left people scratching their head, but not long after the market found a bottom and chewed its way higher, finishing near the day’s high.

What happened here?  Obviously new buyers failed to show up after the gap higher.  The short-squeeze never materialized because shorts are afraid of this market after last week’s volatility tore them to shreds.  We might have even seen a bit of selling strength as the market finally broke 1550 and many traders felt six-days in a row was unsustainable.  This early weakness chased out the premature buyers and left others wondering if the market finally ran out of steam.  And to be honest, the market did run out of buyers.  It wasn’t dip buyers that saved the market today, but running out of sellers.  This entire rally is built on a foundation of unflappable holders and story added another chapter today.

The dip on great employment numbers, low-volume, and the slow grind higher kept bear hopes alive.  Cynicism remains and today’s employment report didn’t change anyone’s mind.  Reluctance from those sitting on the outside continues fueling this rally and the trend higher remains intact.  The one noteworthy absence was shorts and going forward we might not be able to rely on their buying each time we make a new high.

TRADING OPPORTUNITIES

Expected Outcome:
It appears sentiment stayed mostly the same in spite of today’s employment gains and the close above 1550.  This means we should expect a continuation at least temporarily.  We still need to be cautious of accelerating gains on increasing volume, but a pullback to 1545 and sideways trade next week will set the stage for more upside.

I moved my trailing-stop up to 1530 and don’t expect the market to touch this level until it is forming the right side of the head in a head-and-shoulders pattern.

Alternate Outcome:
I expect modest gains before topping in a H&S pattern.  That leaves two alternate outcomes, an immediate crash and a continuation higher.  Today’s dip on good news showed buyers are a scarce and even bullish news won’t get them off the sidelines.  We need to use a trailing stop-loss to protect recent gains from a market meltdown due to a lack of buying.

A more interesting idea is we are only half-way through this bull rally.  Last week’s pullback to the 50dma flushed out weak holders, clearing the way for a larger continuation.  It is not hard to find past examples of long rallies that had a midpoint check-back to the 50dma.  At this stage I am holding and looking for an exit, but both alternative outcomes are at the front of my mind and I am searching for any clues to support either alternative.  Next week will give us more clarity and help us identify the high-probability trade.

INDIVIDUAL STOCKS

AAPL remains stuck between $420 and $435.  Oversold stocks are like a rubber bands and snap back quickly.  Trading flat for a week moves us outside the window of a quick rebound.  AAPL’s trend of underperformance continued as the stock was only up a quarter-percent as compared to the index’s nearly half-percent gain.  Anyone still holding this stock because it cannot go any lower is about to learn a lesson in market extremes.  The market is full of great stocks and there is no reason to hold on last year’s big winner hoping for a bounce when there is so much more to choose from.

NFLX continues trading above $175.  The longer we hold here, the more support the stock builds and the better chances are for a continuation.  I’d still be wary of a dip under $175 setting off a wave of stop-losses, but for the time being the stock looks good.  If someone absolutely must short this stock, only short after the stock breaks $175 and take profits at $160.

AMZN is defying skeptics, trading up to $275.  The overpriced stock that is supposed to selloff keeps holding up while everyone’s favorite stock continues breaking down.  Success in the market isn’t about investing in what should happen, but what will happen.  If too many people believe something, supply and demand will force the market to do the opposite thing.  AAPL and AMZN are perfect examples of contrarian trades.

Stay safe