PM: Game on

PM Update

The rally is back on after stocks decisively recaptured 1500 and closed above 1515.  But on one of the biggest days of the year AAPL was MIA as investors were underwhelmed by investor day.

MARKET BEHAVIOR

Stocks had a good day, recovering most of Monday’s plunge.  Volume was average, but lower than the recent down-days.

MARKET SENTIMENT

Amazing the difference a couple of days make.  Monday afternoon markets were collapsing and bulls were on the menu.  Today the rally is back on and bears are in the fryer.  This is a very impulsive market and anyone listening to his gut is getting torn to shreds.  There was a ton of money to be made, but it took a cool head and a plan, something in short supply when the herd is stampeding one way or another.

Bears took solace from today’s light-volume and warn of lack of conviction, but like anything in the markets, there are two ways to look at it.  Stocks move on supply and demand, nothing more, nothing less.  Within supply and demand, we have 4 constituents that move prices; aggressive buyers, aggressive sellers, reluctant buyers, and reluctant sellers.  Most people intuitively understand the first two where people yell “buy, buy, buy” or “sell, sell, sell”.  This excitability is exhibited during high-volume moves.  But the market also moves on low-volume too.  This is when holders are unwilling to part with their stock at present levels, or buyers are unwilling pay current prices.  Today’s low-volume rally showed unwillingness from holder to let go of their shares.  This reluctance to sell limited supply and resulting scarcity drove prices sharply higher.

The last few days of selling flushed out many weak holders and the buyers who stepped in acknowledged the risk and are more comfortable sitting through some volatility.  Because these new holders are less likely to get spooked out of their positions, their resolve takes out supply and puts a floor under the market.  This is exactly what happened Tuesday.  Today’s 20-point surge further reinforced this phenomena as holders were rewarded for sitting through the dip.  Combine these factors and we have a core group of holders that is far less likely to sell into future volatility.  The interesting thing is this reluctance to sell volatility actually eliminates volatility because supply no longer floods the market.

As we’ve been discussing for weeks now, this market is not going to fall apart on news.  We’ve seen quick dips on the Fiscal Cliff, negative GDP, and now turmoil in Europe, but every time it was a buying opportunity.  We have sequester around the corner, but this is widely telegraphed and while it won’t be pretty, no politician wants to go down with the ship and it will get taken care of.  Anything short of a complete breakdown will just be a sideshow and the market has already priced in some delay.

If this market won’t fall apart on bad news, what’s left?  Running out of buyers.  As more people buy this rally, there are fewer left to buy it.  Once everyone is on the rally bandwagon, we no longer have new people to keep pushing prices higher.  This week’s decisive rebound went a long way to convincing people that the only way to trade this market is from the long side.  And while they are right, they are also late.

TRADING OPPORTUNITIES

Expected Outcome:
Stick with what is working.  The market clearly wants to go higher and look for new highs in coming weeks.  Today’s 20-point rally was huge and a modest pullback to digest these gains should be expected.  But given the decisiveness of this rebound, a dip back under 1500 is a serious failure and most likely signals the end of the rally.

This morning’s break above 1500 was obviously a good entry point, but for those that missed it, it is harder to get in now the market has moved this far.  Look for a dip back to 1510 and use that as an entry point.  No matter where you got it, a stop-loss just under 1500 is a good idea.

The next question is how much further will this go.  Barring a meltdown, 1530 is all but a done deal and 1550 is highly likely.  New all-time highs at 1575 is also on the table, but we need to see the market move ahead sustainably.  If the prices race ahead without taking a break, that will signal exhaustion and the end of this rally as it sucks in the last of the available buyers.  But a more measured and deliberate rally that takes its time is more sustainable and could carry us as high as 1600.  We will revisit the price-action and sentiment at 1550 to determine if we should hang on or take profits.

Alternate Outcome:
The market is an equal opportunity humiliator, zinging both bulls and bears over recent days.  While bulls have the upper hand, this could be one last bull-trap before collapsing on sequester worries.  In markets like these, we have two options, staying on the sidelines, or picking sides.  I’m on the rally side, but recognize that I could be wrong and will use a stop-loss under 1500 to get me out.

INDIVIDUAL STOCKS

AAPL sold off on one of the strongest market days of the year when Cook failed to impress traders at investor day.  There were rumors of stock splits and hopes of giving money to shareholders, but the wishful left empty-handed.  From a sentiment point of view, it is interesting watching the stock respond so strongly to rumors.  A few weeks ago it rallied to $485 before Cook spoke at a conference.  Yesterday it rallied $10 in minutes on rumors of a 10 for 1 stock split.  This reeks of desperation as bulls grasp at straws and jump on any rumor that comes around.  This shows there is still too much hope left in this stock.  When all the faithful already own the company, who is left to buy?

Stay safe