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MARKET WRAP UP 10/11/10

The stock market on this Columbus Day saw no great epiphanies or discoveries that would forever change history. Instead, the broad indices simply digested the gains they made last Friday. Despite the fact that we have become accustomed to perpetually light broad market volume, today was actually the most tepid volume that we have seen since last January. Thus, I am sure you can understand my lack of eagerness about inferring too much from today’s price action. For all intents and purposes, the market ran in circles today, collectively speaking.

Individually, however, was another story. Despite weakness in the energy and financials, we saw some impressive breakouts on strong volume in the commodity, solar and semiconductor spaces. As I noted early in the day, the small-cap China stocks stole the show, as many of them broke out of multi-week bases with spectacular strength.

Going into Tuesday, the bulls must continue to hold above the key 1150-1160 area on the S&P. The longer that they can do so, the more likely it is that the remaining stubborn bears and underinvested bulls will throw in the towel and start chasing this market higher. As you can see on my updated and annotated daily charts below, the leading indices and sectors, save the financials, serve as evidence of a shift in the market’s character away from the range-bound market that we saw this summer, and towards a market trending higher.

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MARKET WRAP UP 10/07/10

In front of the big earnings party that kicked off this evening with $AA reporting, market players held their collective breath today. After retesting and holding the key 1150 zone, the S&P 500 rallied back to finish the trading session down 0.16% to 1158. We saw weakness in the energy and materials, while many tech names recovered from yesterday’s drubbing. Above all else, today was the chop before the storm, if you will.

Whether we see a storm that drenches the bulls or bears remains to be seen. On the one hand, 1150 has held as support on the S&P since the big rally on Tuesday. However, the 1160 area is proving to be tough resistance in the short term. Moreover, while some sectors are quite extended, others clearly are not. Thus, the market remains a mixed bag, with the bulls having the benefit of a series of higher highs and higher lows since late August.

At the time of this writing, I see that Alcoa is up nicely in after-hours trading on the back of an earnings beat. I must say that I am reticent to automatically claim that the market will rocket higher tomorrow just because of $AA. Keep in mind that we also have a much-anticipated jobs report tomorrow morning, which will feature the usually post-report spinning. The zero hedge permabear crowd will thumb through every detail of the report to succinctly illustrate why the world will end tomorrow, while permabulls like Larry Kudlow and Ned Riley will claim that America is back to the sustained organic growth that it saw in the 1950’s.

Instead of playing the macro data game, I urge you to focus on a few other aspects of your trading and the market. First, verify when each of your holdings reports earnings, so as to limit any unpleasant surprises. Next, bear in mind that the market is simply going to do what it wants to do. Indeed, if we are in a bonafide uptrend, then macro news and earnings reports will actually serve as excuses for the market to go higher. Throughout 2009 and parts of 2010, we have seen stocks rise on bad news. To be fair, we have also seen sell-offs on good news. Regardless of how convincing a given macro thesis may be, however, the price action in the stock market pays a far better reward than winning a debate at an effete dinner party, and therefore it commands your respect.

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MARKET WRAP UP 10/06/10

The S&P 500 closed today down 0.07% to finish three ticks below 1160, at 1159.97. Based on that fact alone, you would think that today’s trading session was a wholly boring affair after yesterday’s massive rally. Indeed, many stocks took breathers today, including $AAPL. However, many other high beta names saw sharp declines, specifically in the cloud computing and data storage sectors. The selling in those names was heavy and steady. Despite many high momentum names getting sacked by the bears, the broad market held up remarkably well. The industrial/material/energy complex caught a nice bid as capital flowed out of the technology-led Nasdaq, which is a major reason why the S&P printed a benign doji after yesterday’s powerful marubozu.

The temptation for many market players is to extrapolate on today’s weakness in the high beta plays that the broad market will soon top out. However, I believe that a less formulaic approach is a better strategy here. Just because high momentum names, such as $CRM an $NFLX, have been crowded trades and are now shaking out the latecomers and weak hands, the more pertinent issue to me is where that capital goes when it leaves those issues. Does it come out of the market entirely like it did at various points throughout late last spring and during the summer? Alternatively, does it rotate over to the lagging sectors and thus prevent the broad market from rolling over? Based on today’s action, the answer is unquestionably the latter scenario.

This market has increasingly rewarded dip-buyers over the past several weeks. Throughout the summer, dip-buyers were severely punished, as every time it appeared that the market was poised to breakout to a fresh uptrend, resistance would turn stocks back down to the 1040 zone on the S&P. Ever since late August, however, an interesting thing has happened. The bears who became accustomed to shorting at resistance with ease have been continually squeezed, and the more aggressive bulls have earned a handsome payday.

As earnings season officially kicks off with $AA tomorrow evening, and with a jobs report on Friday, I would expect some more volatility to come back into the market. The extrapolators will argue that this means that the market can no longer go higher. Instead of abiding by a rigid market thesis, though, a more common sense approach will prevent you from falling victim to yet another false breakdown.

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The future ain’t what it used to be.

-Lawrence “Yogi” Berra

MARKET WRAP UP 10/05/10

After digesting the move higher in early September for the past two weeks, the market illustrated today that the summer highs, of roughly 1130 on the S&P 500, have now become strong support. Including yesterday, the bears had every opportunity to take this market back down into the choppy and sloppy trading range where market players spent several months essentially risking dollars in order to make a penny here or there. In addition to 1130 acting as current support, the bulls also firmly held above 1150, which had been acting as tough resistance over the course of the past two week’s consolidation. Beyond the S&P closing up 2.09% to finish at 1160, breadth was incredibly strong, and we even saw a nice uptick in volume compared to that which we saw during yesterday’s dip.

A day like this is a firm reminder to always trade what you actually see, and drown out the noise as best you can. After a sharp rise from the August lows, technology stocks could have easily rolled over and taken the broad market along for the ride down. Instead, they took a benign pause for two weeks and resumed their march higher today. Simply put, that is what I see, so that is what I will trade. At the end of the day, price is all that pays. Macroeconomic headwinds, inept central bankers, and poor unemployment are all good reasons to avoid claiming at dinner parties that all is well with the world. However, those ideas will not matter much to Mr. Market if he is set on going higher.

Barring some type of sudden reversal, Mr. Market does, indeed, have higher prices on his to-do list.

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MARKET WRAP UP 10/04/10

In front of both another earnings season and a government-sponsored jobs report later this week, the S&P 500 saw a good deal of profit-taking today. The real action came just before the New York lunch hour, as the bears were finally able to sink their claws into the broad indices. In the afternoon, however, the action abated as the S&P 500 chopped around before closing down 0.80% to 1137. The good news for the bears is that breadth was pretty poor, with all major sectors flashing red. Despite the lack of green, the selling volume was not particularly intense, indicating that institutions were not sprinting to exit their bullish bets.

Within the broad scheme of things, the bulls firmly held a retest of the summer breakout around 1131. If the bears are going to submit a deal breaker to the bull thesis, then they simply must break and hold below the summer highs. If not, then days like today will be remembered as simply giving many charts the time that they needed to firm up and prepare for another leg higher. Leading stocks, such as $AAPL, $CRM, and $NFLX all have had several days to digest their recent gains, and they have also pulled back to their respective 20 or 50 day moving averages. Looking ahead, it will be telling to see whether the bulls will able to assert themselves at obvious support zones. Thus, with those key stocks hanging in the balance, my strategy today was to raise slightly more cash and exercise patience.

It is often said by many Wall Street critics that investors or traders picking stocks and trying to make money have no better odds than a monkey throwing darts at a board. After consolidating in a tight range for two full weeks, there will most certainly be a group of traders who are caught leaning heavily in the wrong direction whenever the market explodes (crashes) from this compressed state. However, as individual traders we have exclusive control over how much risk we decide to take. Despite how many stocks have worked through bases during the past few months, I am still reticent to become very aggressive with the market oscillating between 1130 and 1150.

On this one, it is best to leave the front-running to the monkeys.

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MARKET WRAP UP 09/30/10

On the last day of the third quarter, the market threatened a major breakout within the first twenty minutes after the opening bell rang. As quickly as the S&P 500 touched 1157, it rejected that level and reversed down to 1136. At that point, the dip-buyers made another appearance to close the session down 0.31% to 1141. After a day like today, the temptation is to make a comparison to the nasty reversal we saw back on June 21st of this year, where the S&P briefly touched 1131 and then proceeded to reverse course and head down to 1010 over the next two weeks.

The simple answer is that we saw immediate confirmation to the downside following the reversal back in June, after printing that massive red engulfing candle. Beyond that, though, in the current market I believe that many individual stocks and sectors are much more technically sound than they were in the middle of the summer. Bases have had months to form and many stocks have tightened up their patterns. Moreover, many of the leading stocks have not only broken out on strong volume, but have held those breakouts after the fact.

Despite the healthier nature of the current market, compared to that which we traded this summer, there is a bunch of economic data yet to be released tonight and tomorrow. Even if you know the actual data ahead of time, there is simply no way to know how the market will react to it. So, as I wrote last evening, we are dealing with several known unkowns as well. After consolidating just below the significant 1150 level for nearly ten trading days, one group of traders will surely fall into a trap. The reversal this morning has many calling for a bull trap.

However, with the false breakouts this summer still fresh in the minds of traders, combined with no real follow-through to the downside yet, the bears would be remiss to not consider that they may be trapping themselves.

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