Until S&P 500 Retakes 1400 Level, Expect More Hope, Fear, and Confusion

Schaeffer's Investment Research
  NOV 19, 2012 10:05 AM

Plus, a look at Netflix -- a stock that's been on a roller coaster this year.


Friday was option expiration for November, and market action was on a roller-coaster ride on Friday, November 16. Friday morning, indexes sold hard off the open, but that despair was met with some hope, as John Boehner, Nancy Pelosi, Harry Reid, and Mitch McConnell made favorable comments about their first meeting with the president regarding the upcoming US fiscal cliff.  From top to bottom, the S&P 500 (INDEXSP:.INX) rallied nearly 20 points in a matter of about an hour on this hope event.  The leader of this rally was Apple (NASDAQ:AAPL), which saw a 5% intraday bounce on very heavy volume.

The mood shifted dramatically in a very short period of time, as an element of hope has entered the market and the biggest fear among investors seems to have been stymied for the time being.  The sharp rally that we saw Friday is a good example of what can happen when the market has largely priced some potentially bad future news.

This stock has been a roller coaster this year, peaking at around 130 in early February, and then pulling back all the way to the 55 area a few times this summer.  Despite very negative sentiment, NFLX is still posting a YTD gain of about 17%, outpacing the S&P 500 by about 10%.

What I like about this chart is how NFLX has shown some serious relative strength over the past couple months. During a time when the broad market experienced a pullback of about 8%, NFLX is up nearly 40%.  In addition to the strong price action and nice technical setup here, short interest has actually risen by about 2 million shares over that same time frame, and analysts have become more bearishly aligned toward the company.  This combination of strong price action amid skepticism leads me to believe that there’s more upside here.  The 80 level, site of the gap from 7/24 and close to the 200-day moving average, looks like it should serve as support going forward.

What I'm Expecting

More hope, fear, and lack of clarity.  The next month and a half should be very interesting.  Similarly to what we saw early in the summer with European economic woes dominating the headlines, the daily tape will largely be driven by news of a potential deal, discussions stalling, etc.  Don’t get too caught up in the noise, and pay particular attention to the overall trend and align that to your trading timeframe.  Given what we’ve seen in the markets for the past couple months, the primary trend is now down.  There’s nothing saying that we can’t completely solve the fiscal cliff conundrum and rally into the end of the year, but until the 1400 level can be retaken on the S&P 500, markets are guilty until proven innocent.

This article by Bryan Sapp was originally published on Schaeffer's Investment Research.

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