AM: Digesting gains

AM Update

MARKET BEHAVIOR

A quiet and uneventful morning after seven consecutive sessions of heart-pounding volatility.

MARKET SENTIMENT

Neither buyers nor sellers showed up in force and the market is digesting recent gains.  The last week-and-a-half humiliated bulls and bears alike as it duped many into making impulsive and ill-timed trades.  At present everyone is too shell-shocked and hesitant to make a decisive move, but this calm is an important step in regaining composure.

When in doubt, stick with the trend.  The high-volume selling purged all complacency and much of the fat that accumulated since the start of the year.  Technically speaking, the dip under 1500 cleared the minefield of automatic stop-losses, making that area far less dangerous to the market.  But chances are we won’t test this area again since all the sellers under 1500 now need to figure out how to get back in and their buying will prop up any potential dips.

When the market marches ahead, those left behind hope for a pullback.  We had that pullback this week, but how many jumped on the opportunity to get in?  My guess is not many.  In fact many of the holders who were lucky enough to be in the market were spooked out by the dip under 1500.  Now both of these groups need to figure out how to get back in and their chasing is the fuel that will keep this market moving higher.

Buying is only half the equation and we also need to consider sellers.  Anyone who held through recent volatility is feeling pretty good about themselves right now.  Maybe they held because of discipline, or they failed to sell because they froze under pressure, but either way they are congratulating themselves for sticking it out.  This affirmation and positive reinforcement makes them holders less likely to sell the next dip.  Add to this to all the buyers looking to get in and we have a recipe for higher prices.  At least until we run out of buyers…….

TRADING OPPORTUNITIES

Expected Outcome:
We might see some weakness if sequester negotiations bog down, but most holders expect this and are growing immune to the gridlock in DC.  The more interesting thing will be watching the post-sequester trade.  Will the market spike on a deal?  Is the market already expecting the deal and will selloff on the news?  Can it do both?

An interesting trade would be a surge higher on compromise out of DC, but if the buying comes in too fast, it could build the head of the head-and-shoulders.  A one-way run up to  1550 or 1575 should be looked at with a healthy dose of skepticism.  On the other hand, modest, measured, and earned gains are sustainable and indicate there is more left in this rally.  The recent dip to the 50dma refreshed and renewed the rally meaning we might only be halfway through this move.

Alternate Outcome:
After the Fiscal Cliff and Debt Ceiling scares and last second compromises, the market might be looking past the sequester expecting a deal is all certain.  The risk is if politicians say enough is enough and refuse to compromise any further, using a govt shutdown to prove a point.  Its happened before and the uncertainty will roil the markets.  While certainly a possibility, our politicians care more about their reputation than doing the right thing.  Look for them to be politically expedient and leave the hard work for someone else down the road.

INDIVIDUAL STOCKS

AAPL is finding support around $445 and is resisting a selloff after an uninspiring investor day yesterday.    $450 has been near-term resistance.  Breaking above and holding this level would be supportive of a swing-trade higher.  The stock already missed the opportunity for a quick rebound and any long-term investors should expect a 12 to 18 month.  In the meantime there is still a lot of money to be made swing-trading or selling options.  Just because this isn’t a set-it-and-forget it trade anymore doesn’t mean we should stop paying attention to it.

Stay safe