Apr 072014
 
S&P500 daily at end of day

S&P500 daily at end of day

End of Day Update

MARKET BEHAVIOR
Stocks sold off for a second day, slicing over 50-points from Friday’s intraday highs.  We are just above the 50dma, but under 1,850 support.  Volume was elevated, but only just above average, so this move doesn’t qualify as a stampede for the exits.

MARKET SENTIMENT
Easy come, easy go.  Friday we set record highs following a respectable employment, but its been all downhill since then.  While there are no major headlines to speak of, many high-fliers are crumbling and that is dampening the mood in the rest of the market.  We haven’t seen major waves of selling indicating most owners are largely holding through the dip.  This weakness is primarily coming from the absence of demand as anyone with money was reluctant to buy all-time highs as we ran out of momentum chasers.

Typically there are two types of large selloffs.  The first is the familiar headline driven panic selling.  This is typified by overwhelming fear the market is about to crumble because some structural flaw has just been uncovered.  That doesn’t seem to be the case here since the best most people can come up to explain this weakness is “profit-taking”.  The other type of extended decline is the “stealth” selloff.  This is the one that sneaks up on us by lulling traders into complacency.  These are the declines that no one notices because they are trivial by themselves, but over time they add up.  The last-two days of weakness is many things, but stealth is not one of them.

The emotion and pain of the recent plunge sent most with a weak stomach running for cover.  Most of these are the late to the party momentum chasers and breakout buyers.  They are the ones that first showed losing trades and are the most likely to impulsively pull the plug.  Now that many of these flaky owners have jumped ship, they were replaced by more confident buyers willing to own the uncertainty and this is the start of the bottoming process.  This selloff will finally end when the supply of sellers dries up after all who were inclined to sell already sold.  Given how transfixed the market has been by the last two days, we are probably getting close to this capitulation point.

TRADING OPPORTUNITIES
Expected Outcome: A little more weakness before finding a bottom under the 50dma.
Short-term traders are well aware of this weakness and many sold as we undercut their stop-losses.  This autopilot selling is provided much of the downside pressure, but now that many of these traders are out of the market, that overhang has been removed.  What hurt us today cannot hurt us tomorrow.  While we likely have some traders barely holding on and slipping under the 50dma will flush this last wave out, once these stragglers sell, expect the market to run short of supply and bounce.

Alternate Outcome:
Nothing shatters confidence like losing money.  No matter how confident we are, when everyone else is rushing for the exits, it forces us to wonder if they know something we don’t.  All of us have our breaking point before we succumb to the emotional pressure and join the herd.  If the market doesn’t find a bottom shortly after breaking the 50dma, the selling will likely continue as previously confident holders start selling first and asking questions later.

Trading Plan:
The market will likely find support near the 50dma in coming days, but if it doesn’t bounce in a v-shaped rebound, it needs one last plunge lower before returning to 1,900.  Long-term traders should ignore this volatility, but short-term traders can look for an interesting entry point when the crowd is convinced we are on the verge of a dramatic plunge lower.

Plan your trade; trade your plan

 Posted by at 10:34 pm on April 7, 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
Apr 012014
 
S&P500 daily at end of day

S&P500 daily at end of day

Intraday Update

MARKET BEHAVIOR
Stocks are higher on the first day of the second quarter and the S&P500 set a new intraday record.  We are at the upper end of the 1,840/1,885 range that stretches back to early February.

MARKET SENTIMENT
Early highs did not set off an avalanche of short-covering, but we only poked above the old record by less than one-point.  Either shorts are sitting tight, or there are few shorts left to cover.  While not a scientific sample, Stocktwits’ SPY sentiment gauge reads 57% bearish, not a level suggesting we are running out of shorts.  The most likely scenario is shorts who were previously shaken out in the last month of whipsaws moved their stops a little further out.  This means we need to push closer toward 1,890 for a short squeeze to begin in earnest.

But short-squeeze or not, the future of this move to new highs depends on the appetite of the masses sitting on piles of cash.  Will they embrace the breakout, or continue waiting for lower prices?  While short-term traders on Stocktwits are wary of this market, most owners are content sitting on their profits and are reluctant to sell regardless of scary headlines like political and military conflict with Russia.  If that doesn’t spook owners into selling, I’m not sure what will.

TRADING OPPORTUNITIES
Expected Outcome: Push to new highs before stalling on lack of follow-up buying.
There is no such thing as a triple top, so it seems likely we are destined to bust through 1,885 in the near-term.  Markets typically collapse from unsustainable levels in quickly, so holding these levels for multiple weeks suggests we are not yet at unsustainable levels.  We will push toward 1,900 in coming days, but unless those with cash embrace this breakout, expect it to stall and fall back under 1,850 on weak demand.

Alternate Outcome:
The S&P500 was up a trivial 1% in the first quarter of the year and this sideways trade helped consolidate recent gains and cool a hot market off.  This pause makes it easier for the market to resume the previous uptrend.  If we break above 1,900 and hold those levels, this bull is ready to rip.

Trading Plan:
The best trade of 2014 has been buying weakness and selling strength and it is unlikely to be any different here.  We will likely challenge 1,900, but that creates a better selling/shorting opportunity than buying one.

Plan your trade; trade your plan

 Posted by at 11:21 am on April 1, 2014