Another bounce off of 1400

MARKET SENTIMENT

Markets retreated 0.5% in morning trade and were again flirting with 1400.  The big question is if 1400 is providing rock solid support for a move higher, or if the market is running out of steam every time it tries to move higher and we are seeing the last desperate gasps of this rally before heading lower?  We’ve bounced off this level several times already, showing good buying support here, but the fact we can’t escape this key level is also concerning.

I keep coming back to all the pessimism and reluctance from other traders.  Everyone I talk to thinks we came long way and is afraid of committing capital to this market.  Very few are 100% invested and hardly anyone is on margin.  This is a lot of money sitting idle waiting for the expected correction.  But the market usually does the opposite of what most people think and if too many are waiting for a correction, then it won’t happen.  This is what I think is happening here.  I interpret 1400 as rock solid support the bears are unable to push the market through.

Last Friday was Jackson Hole, anyone remember that far back?  The market was on edge for a week in anticipation of Ben’s “To QE, or not to QE” speech.  Seems forever ago, but it was less than a week.  The reason I’m dragging up this “old” news is to demonstrate how most news in the markets is fairly trivial and what we often are waiting on pins and needles over will be stale minutes after it is released.  The market already knew what it would do even before the Fed’s statement because it was already priced in.  You will get a lot further in this business if you focus less on the news and more on other traders.  Lets face it, the news is a for-profit endeavor and they attract advertiser money by hyping sensational stories to attract viewers.  Don’ buy into it.

MARKET BEHAVIOR

The market is stuck in a 1400-1410 trading range since making a new high two weeks ago.  Volatility has picked up a smidgen, but is still quite low.  This morning’s “plunge” was 1/2%.  Looks scary by itself, but in context of the last 4 years, it is almost laughable.  Today is the third test of 1400 since the S&P500’s new high back on August 21st, but so far 1400 is holding rock solid again.

We continue trading inside this summers trading channel, making our way to the lower trend-line through sideways trade instead of a move down.  The 50dma is also quickly catching up to current levels and is just a couple percent under the market.  All indications that we are not as high and extended as some might believe.

TRADING OPPORTUNITIES

Every close for the last month has been above 1400, creating a nice level of support.  But this also adds to the potency of a move lower if we do break under 1400.  This strong support gives us confidence to wade into the markets, but we should take any material violation of support seriously and reevaluate the bull thesis if the support fails in a meaningful way.  (intra-day dips under don’t count)

INDIVIDUAL STOCKS

Individual stocks are showing a lot of strength, firmly supporting this market’s bullish theme.  Even better, we are seeing more money flow into more speculative small-cap growth names that have been under performing recently.  All good signs there is something more to this bull rally than defensive and cyclical stocks.

SWI is adding to it’s previous breakout.  HAIN is defying gravity. MLNX looks to be wedging higher, something to be cautious of.  MLNX’s big move put it on everyone’s radar and small buyers have chased this stock since its gap.  Before the stock can make a big move higher, it will need a shakeout to free itself from all these late to the party, me-too investors.  Don’t fall into the trap of investing in what seems safe because those are the most dangerous stocks to own.  Anyone in MLNX should consider locking in a portion of their profits and waiting for a better place to buy back in.