Low volume selloff continues

S&P500 daily at end of day

MARKET BEHAVIOR

Markets sagged for the 4th consecutive day.  We’re testing support at 1430 and pushing toward the 50dma.  We didn’t mark a new 52-week high like I expected, but AAPL started weighing on the markets before that could happen.  The S&P500 looks like normal profit-taking within a longer rally, but the NASDAQ is having a tougher time.  Interesting thing is while AAPL dragged us lower, it found support and finished positive for the day, but the wave of selling spread and even AAPL’s newfound resilience couldn’t prop up the market.

The market corrected more than 2% over the last 4-days, but volume each day was under average.  There are two ways to look at this.  First sellers are not rushing for the door and continuing to hold.  Prices are declining because buyers are not stepping up, preferring to wait and see.  This interpretation of low-volume is bullish because the market is not flooded with supply.  But on the other hand, the big red flag is we have not had a high-volume flush-out that clears the way for a move higher.  The low-volume selling means weak holders are still holding and chances are we need to see a high-volume capitulation point before we can turn around.  This could happen tomorrow as we penetrate the 50dma and fall under 1425 support.  Or complacency could let us drift lower for a longer period of time.  We’ll know the answer soon enough.

MARKET SENTIMENT

It feels like we are stuck in no man’s land.  There is a fair amount of pessimism in the headlines, yet there is complacency in the market as demonstrated by this low-volume selloff.  This could be a typical mid-rally consolidation that puts some fear back into complacent traders.  Most likely this slide will continue until we get that high-volume capitulation day.  That could happen tomorrow, or it could happen next week.  But we need renewed fear before the rally can continue.  The buy-the-dip trade has worked a bit too well and the market is setting up to zing those showing up late to the party.

Looking at the calendar, I think we could see the weakness and/or indecision continue into the election.  And then just for fun, the market will rally after an Obama win.  The market doesn’t like to be predictable and a rally into the end of the year will be the least expected thing to do.  Flipping buy-the-rumor, sell-the-news on its head, we should sell-the-rumor of an Obama win, and buy-the-news.  So far the market is setting up that trade.

But what I am talking about is a few percent move one-way or the other.  Sentiment is not skewed enough for a major jump either direction.  We are at similar price levels as this spring, but there was a huge level of complacency after the best Q1 rally in 20+ years.  That complacency is what enabled the big selloff.  But we are also not at the same level of pessimism we saw this summer, which fueled the 3rd quarter rally.   We’re stuck in the middle and as such we should expect a middling move from here.

TRADING OPPORTUNITIES

Buy weakness, sell strength.  The market is a pendulum swinging back and forth as market participants waver between emotional extremes.  We are on the downtake here, but wait for the capitulation point before buying the dip.  A high volume pop on surprising news could also be buyable, but the rebound will have a more solid foundation if we shake out the complacent holders first.

The market is not rife with optimism and complacency; so don’t anticipate the market breaking down.  The uptrend remains intact until further notice and shorting a bull market is a great way to lose money.  If you are short, don’t get greedy and consider taking quick profits on a break under support.

AAPL daily at end of day

INDIVIDUAL STOCKS

Sorry to keep talking about AAPL, but it is one of the most owned stocks and it represents an oversized portion of the indexes.  I’ve seen too many buy-the-dip articles concerning AAPL and that continued bullishness makes it seem like there is more downside left in the stock.  But unlike a bubble stock that crashes and burns, AAPL is the bluest of the blue-chip stocks and people will be buying every dip.  Stocks like that don’t crash, they glide lower.

I’m not saying this is what is happening with AAPL, but just be aware that AAPL won’t crash, it will drift lower.  Let that be a warning for both bulls and bears.  For bears, don’t expect huge drops, take your profits early and re-short the bounce.   For bulls, don’t let the gentle decline and repeated bounces give you a false sense of security.  In my honest opinion, there are a lot better trades in the market than buying or shorting AAPL.

Stay safe