AM: Running out of buyers

AM Update

MARKET BEHAVIOR

Markets traded lower this morning.  If you read the financial press, they’ll claim some piece of news caused this weakness, but reality is we ran out of new buyers after running up 90+ points in just a few weeks.  As anyone who reads this blog knows, only supply and demand drives market prices.  Fundamentals and technicals are secondary and that is why going against the crowd is often a winning strategy.  You can have the best fundamental or technical analysis in the market, but if supply and demand is not on your side, you’ll lose money.

MARKET SENTIMENT

We’ve seen a lot of buying in the last few weeks at the market gained 90+ points from the November lows.  Most of this move was simply recovering the emotional selling that took place after Obama’s reelection.  But where does that leave us now?  Did we come back to equilibrium, or did we overshoot and are poised for a pullback?

It seems likely we’ve exhausted the supply of available buyers for the time being.  Momentum traders jumped on the bandwagon and shorts have been blown out.  Regardless of what the news reports, to go higher we need to find new buyers willing to pay even more to continue this rally.  Short-term traders make up most of the daily trading volume, but they have limited buying power and only institutional money can sustain moves higher.  But the thing about institutional money is they hate chasing stocks and prefer buying the dip.  If we’ve exhausted the supply short-term money, we will pullback some before big money will step in and start buying the dip.  Two steps forward, one step back.

TRADING OPPORTUNITIES

Don’t expect a major market correction here.  If you are tempted to trade the short side, take your profits early and often.  If you are a swing trader, now is a good time to lighten up and wait to buy back in at lower prices.  Value investors, hang on and don’t let the noise around you distract you or make your question your resolve.  This will be a modest pullback and look for a rally early next year as a lot of this tax motivated selling and special dividend money is reinvested in the markets.

INDIVIDUAL STOCKS

AAPL is the high-beta trade, down 3x the indexes losses, but this shouldn’t surprise anyone.  One more selloff will purge the stock of the last holding on and set the stage for a consolidation and recovery.  Once all the people who can be scared out are scared out, supply will dry up and the stock start a recovery   The Apple Inc story is not broken and the company is fundamentally sound.  AAPL stock on the other hand was over-owned and that lead to the pullback because it ran out of new buyers.   I’m a loyal Apple Inc fan, but not an AAPL stock bull by any stretch.  I see the stock entering a decade-long sideways trading range as it continues to grow internationally and print money with shockingly high margins, but it will lose market share to lower priced competition and they will not come up with the next disruptive, must-have gadget.    I actually think the Windows 8 family of products are the most promising thing out there, but it will take a couple of years for them to get the hardware and software mix just right to compete with the fit and polish of Apple.

Stay safe