Apr 142014
 
S&P500 daily at end of day

S&P500 daily at end of day

End of Day Update

MARKET BEHAVIOR
Stocks closed higher and recovered most of Friday’s losses, but it was a wild ride getting there.  After an opening gap higher, the market slipped to break even before staging a late-day rally back to the early highs.  Volume was well under average on the first day of this holiday-shortened week and the S&P500 remains under the widely followed 50dma.

MARKET SENTIMENT
Sometimes markets are overwhelmed by surges in supply and demand, other times they move because no one is buying or selling.  Today’s low-volume rally had selling take a break as we floated higher on tight supply.  This strength took pressure off nervous owners, but it didn’t do much to tempt reluctant dip-buyers that were burned by last week’s false bottom.  While there were few buyers, there were even fewer sellers and is why we ended the day higher.

With the S&P500 down over 4% and the NASDAQ 8%, many are claiming this is the 10% correction that is long overdue.  These people point to similar corrections in years past, but to me there isn’t much similarity because the examples they hold up were driven by some fundamental change that altered investor’s outlook on the future.  Euro Contagion and the downgrade of US debt were the two biggest selloffs of this 5-year old bull.  While the technical setup might be similar, we still lack the fundamental catalyst that changes confident investors outlook on the future.  Without those fear mongering headlines, this dip will likely be little more than the normal back-and-forth.

TRADING OPPORTUNITIES
Expected Outcome: Without a fundamental reason to sell off, we will remain range bound.
While I don’t see any reason for the market to implode here, there also isn’t much reason for it to race off to the moon either.  We trade sideways more often than directionally, so why are so many people taking sides, predicting a launch higher or collapse lower?  Why can’t we simply hang out in a 100-point trading range through summer?

Alternate Outcome:
Sometimes we don’t know why markets selloff until after the damage is done.  Maybe there are people far smarter and connected than we are and they are liquidating positions ahead of the imminent market collapse.

Trading Plan:
While it is fun to predict market collapses, smart money bets on a continuation of the previous trend.  That’s because a trend will continue countless times, but only reverses once.  It’s a numbers game.  While it is hard to get excited about the upside, the market is in a better position to bounce than continue lower.

Plan your trade; trade your plan

 Posted by at 10:42 pm on April 14, 2014
Apr 082014
 
S&P500 Daily at 1:13 EDT

S&P500 Daily at 1:13 EDT

Intraday Update

MARKET BEHAVIOR
Stocks bounced off the 50dma in early trade and are holding near 1,850 as they search for direction.  So far today’s move is more like a pause than decisive rebound since we are only up a few points from Monday’s close.

MARKET SENTIMENT
For as much drama as two-days of selling caused, we are only 2.5% from all-time highs.  This can be taken one of two ways.  Either this dip is no big deal and we shouldn’t be obsessing about it, or this is the start of something that still has a long way to go.  Of course the truth most likely lies between these two extremes.

Today’s pause marks the end of two-days of emotion fueled selling.  Those with a weak hand were flushed out in the rush for the exits, but confident owners continued holding and that limited new supply.  As soon as the emotional finished selling, the market found a floor and this is taking pressure off any remaining anxious holders.  But the fate of this move is no longer in the hands of holders.  Instead buyers will be the ones to save us.  Traditionally this is a mix of value investors and dip buyers.  Today’s pause is tempting dip buyers, but it is hard to claim a 2.5% discount from all-time highs represents a great buy for the stingy value investor.  Sometimes dip buyers can do this on their own, but if we need the value investor’s help, we probably need to slip a little further before they come to the rescue.

TRADING OPPORTUNITIES
Expected Outcome:
If the marked doesn’t end this dip in a decisive v-bottom today, we will likely hold near for 1,850 over coming days.  This leaves us vulnerable to one last emotion filled selloff as those barely hanging on get flushed out.  That last dip will likely be the end of the selloff and clears the way for a continuation higher.  We saw a similar move in late January.

Alternate Outcome:
While big selloffs usually need a reason, sometimes we only come up with one after the fact.  While this is behaving like a vanilla pullback, it could devolve into bigger waves of emotional selling if dip buyers and value investors don’t have sufficient numbers to prop up the market.  Every dip is buyable until the one that isn’t.

Trading Plan:
There is not a lot to do here as we wait for the next trade.  We will likely see one last dip lower before bottoming.  This means shorts can continue holding and dip buyers can wait for a better entry.

Plan your trade; trade your plan

 Posted by at 11:15 am on April 8, 2014
Apr 042014
 
S&P500 daily at 1:23 EDT

S&P500 daily at 1:23 EDT

Intraday Update

MARKET BEHAVIOR
We slipped over 25-points from record highs as buyers failed to embrace these new levels.   The market opened strong following a decent employment report, but we waterfalled lower as the market undercut recent technical levels at 1,890 and 1,880.

MARKET SENTIMENT
This reaction was not driven by fearful headlines and is primarily the result of traders trying to game each other.  We often see volatility surrounding the monthly employment data, but it is typically short-lived and over the last few years it hasn’t had a lasting impact on trading.  Good report or bad, the market continued its relentless march higher from the 2009 lows.  It seems unlikely today’s decent employment report that fell in line with expectations will derail this rally.

We have seen periodic selloffs during this 5-year-old bull market, but each was following some spooky headline that threatened the solvency of the global financial system, giving traders flashbacks of 2008.  We’ve seen more modest weakness recently due to political gridlock or the impending Taper, but so far we don’t have any of that headline fear mongering going on today.  That means this is not the “crash” bears have been waiting for and this move is simply a rebalancing of supply and demand.

TRADING OPPORTUNITIES
Expected Outcome:
The market is in the middle of an emotion driven selloff.  We are undercutting recent support levels as autopilot stop-losses are kicking are adding fuel to the fire, but so far there is little headline fear to shatter the confidence of bulls that have been conditioned to buy every dip.  Once the selling frenzy slows, expect the market to find a floor as supply dries up.

Alternate Outcome:
There are bullish and bearish headlines every single day.  If the market wants to sell off, it will be easy to find a justification.  Nothing shatters confidence like screens filled with red.

Trading Plan:
Long-term investors should ignore these daily moves, but shorter-term traders should be treading lightly here.  Bears shouldn’t expect the market collapse without a dramatic headline and bulls need to be careful about buying the dip so close to the upper end of the recent trading range.  Sometimes the best trade is no trade.

Plan your trade; trade your plan

 Posted by at 11:24 am on April 4, 2014
Apr 032014
 
S&P500 daily at 1:43 EDT

S&P500 daily at 1:43 EDT

Intraday Update

MARKET BEHAVIOR
Stocks dipped under 1,890 after setting record highs earlier in the session.  Following four-consecutive up-days, it is not alarming to have a modest down day.

MARKET SENTIMENT
So far this weakness has not opened the floodgates of selling and we gently drift lower as most owners show little concern and resist selling.  If recent headlines didn’t spook them, an 8-point dip from record highs is unlikely to either.

I’ve been waiting for a short-squeeze to launch us to new heights, but so far we haven’t seen bears rush for cover.  We are only a few points above previous highs, so many might be holding on in the hopes this move will reverse lower.  If a person believes in the “pain trade”, we haven’t seen real pain yet and both bulls and bears are confidently sitting on their positions.

There are few upside catalysts left for this market since it has largely priced in any and all good news on the horizon.  While there are risks out there, few owners are willing to sell at a discount because they have been conditioned to expect higher prices in the near-term.  Every time they sold scary headlines or weakness in the last 18-months was a mistake and they are determined not to do it again.  While many claim complacency leads to a top, it is actually a bullish catalyst.  When owners refuse to sell for any reason, that keeps supply tight and makes it very easy for the market to rally.  Markets don’t top on owners’ complacency, but lack of demand from buyers.  To figure out where this market is headed, we need to spend more time focusing on the opinion of those sitting in cash than those owning stocks.  Given how far we are away from levels that value investors find attractive makes us vulnerable to slipping on light demand once the momentum crowd catches up to this market and becomes fully invested.

TRADING OPPORTUNITIES
Expected Outcome: At the upper end of an extended consolidation and trading range.
While we might see a short squeeze in the near-term, with so few upside catalysts remaining, we will likely continue trading sideways for the remainder of the quarter.  Unfortunately for many recent buyers, trading sideways means holding within the recent trading range that goes as low as 1,750.  We don’t get paid for owning sideways markets and this is a better place to be locking in recent gains than initiating new positions.

Alternate Outcome:
Momentum is a powerful thing and carries us far higher and longer than anyone expects.  There is enough money sitting on the sidelines following the 2008 market collapse that is finally warming up to the market.  While that is a long-term bullish catalyst and will likely lead to a decade-long secular bull market, we will see periodic selloffs and even bear markets along the way.  While we can easily continue higher, stay vigilant.

Trading Plan:
Long-term investors should ignore these intermediate fluctuations, but they should hold off making new purchases since the patient will likely see lower prices over the next 6-months.  Short-term traders should consider locking in profits or using a trailing stop to protect recent profits.  Bears should be rooting for a strong short-squeeze that ultimately fizzles after sucking in the last of the demand.  Failure to hold those gains is the signal to go short.

Plan your trade; trade your plan

 Posted by at 11:45 am on April 3, 2014
Apr 022014
 
S&P500 daily at 3:04 EDT

S&P500 daily at 3:04 EDT

Intraday Update

MARKET BEHAVIOR
The S&P500 is flirting with 1,890, setting record highs in midday trade before pulling back a few points.  In the absence of prior levels to reference, traders are naturally drawn to round numbers and today 1,890 is providing overhead resistance.

MARKET SENTIMENT
Defying skeptics, this market is off and running yet again.  So far it is only poking its head into new territory and shorts are not scrambling to cover their positions.  Either they are sitting on their bearish positions, hoping this upward move stalls, or there are so few pessimists left to cover we are not seeing the typical short-squeeze.

But here is the thing, bears should be hoping for a swift surge higher.  Trading sideways is constructive and supports a continuation.  Exploding higher on one last dying gasp is the most bearish thing this market could do.  There are no such things as triple-tops, so bears needs us to race to new highs if they want the market breakdown.  And the opposite is true for bulls, they should root for modest and sustainable gains.

There is little headline fear left in this market, meaning we are not weighed down by some overhyped risk.  This negates the profitable upside of something coming in less bad than feared.  Taper, Crimea, interest rate hikes, the market is taking it all in stride and owners are unwilling to dump shares at a discount no matter what the headlines are screaming.  Price moves often overreact on both the high and low side.  Over reacting to uncertainty creates buying opportunities, but just as often we get too high and fall under their own weight when everyone is holding on for higher prices.

Then we complicate the situation by throwing timeframe in the mix.  Sometimes the market is short-term bullish, medium-term bearish, and long-term bullish.  We can go up for two-weeks, slip to 1,700 by mid-summer, and close next year above 2,100.  Timeframe is what lets both bulls and bears be right at the same time (or both wrong if they impulsively react to the inevitable head fakes).

TRADING OPPORTUNITIES
Expected Outcome: One last surge higher before stalling into the summer doldrums.
While this rebound could stall at any time, that would be a little too easy for bears.  Often the market convinces us we are wrong just before proving us right.  Once last short-squeeze would send bears running for cover, but the market would rollover not long after if buyers fail to rush in and buy record highs.  Markets trade sideways around 60% of the time and being near the upper end of the trading range suggests we should be cautious since typical odds suggest we are more likely to fall back into the trading than race to 2,000.

Alternate Outcome:
Trading flat for the first quarter of the year took some froth out of last year’s hot market and allowed us to catch our breath.  Sideways is an important part of moving higher and sometimes three months of consolidation is all we need.

Trading Plan:
This has been a “buy weakness, sell strength” market and there is no reason to think it has changed.  As we break above old highs, we should be more inclined to sell the strength than chase the breakout.  Longer viewed holders should keep holding, but the patient will likely find better prices in coming months if they are looking to add to their favorite positions.

Plan your trade; trade your plan

 Posted by at 1:05 pm on April 2, 2014