AM: Testing 1400

S&P500 daily at 2:26 EST

AM Update

MARKET BEHAVIOR

Stocks are down for the 4th day and finally breached the 50dma.  Volume is light in the holiday shortened week, but volatility and uncertainty remain high because of the ongoing Fiscal Cliff debate in Washington.

MARKET SENTIMENT

Not many big money managers are interested in buying stocks this holiday week.  As we discussed last week, most senior decision makers are on vacation and the junior traders manning the desk don’t have the authority to make new buys and are just there to sell stock if we break key technical levels.  Today we find ourselves at two of these key levels, the 50dma and 1400.  Will stocks fall further as automatic sell orders are placed and value buyers are on vacation and not there to put a floor under the market?

There are few optimists remaining who think a Fiscal Cliff deal will happen before the end of the year.  Falling off the cliff is already baked in and we don’t need to fear a massive selloff when we officially go off the cliff next week.  It is so widely expected, anyone who fears the cliff already sold, limiting the amount of new selling to hit the market when it actually happens.  But while we won’t get hit with a wave of selling, lack of buying can also push prices lower and we could see further weakness until value buyers come back to work next week.

TRADING OPPORTUNITIES

Expected Outcome:
Most of the Fiscal Cliff fears are already baked in the market, meaning there is more upside than downside at this point.  Traders can wait for more weakness to develop, but don’t pile on the short-side expecting a plunge because most of the selloff has already happened.  Instead start looking for the next big opportunity on the long-side as the market moves past Fiscal Cliff worries.  Finding support at 1400 would signal a good time to buy stocks.  Buy the rebound instead of trying to catch the falling knife.  A dip under 1400 could trigger more selling before we finally bottom, so wait for the confirmation.

Alternate Outcome:
While a lot of the professional Fiscal Cliff selling has already taken place, the wildcard is an emotional selloff from 401k investors.  Will these less experienced investors hit the panic button when the January 1st headlines are screaming Fiscal Cliff collapse?  There is a chance we could see a repeat of the cascading post-election selloff, but that seems less likely because November’s selloff shook out most weak and emotional hands, leaving us primarily with holders that are less skittish in the face of uncertainty, hence the reason they are holding in the face of the Fiscal Cliff worries.

AAPL daily at 2:26 EST

INDIVIDUAL STOCKS

AAPL is making a move for the $500 level again on the back of broad market weakness.  Recent support at $500 might encourage more adventurous value investors to jump in at these levels.  As risky as it seems owning AAPL down here, this is the safest time to own AAPL in nearly a year.  AAPL has gone from everyone’s favorite stock to the favorite whipping boy with countless reasons not to own it.  The recent slide made it hard to remain positive on the stock, but this change in sentiment was inevitable given how bullish everyone has been for so long.  Can the stock slide under $500?  Absolutely, but buying AAPL at $500 is without a doubt safer than buying it at $700.  Keep an eye out for a material penetration under $500, but 10% risk to the downside and 20% opportunity to the upside sets up for a nice trade.

Stay safe