AM: Waiting for the next move

S&P500 daily at 1:22 EST

AM Update

MARKET BEHAVIOR

The S&P500 is trading near flat this morning after yesterday’s big selloff.  A new wave of sellers failed to show up, but buyers are also taking a wait-and-see.  And here we are waiting for something to bump the market one way or the other, giving bandwagon traders something to jump on.

We are quickly approaching the holiday and trading volume will fall off with each day closer to Christmas.  There are two effects to watch because of this light volume.  First, big money managers are on vacation and without their approval, junior traders manning the desks will have limited buying authority.  Second is the low volume will make it easier for smaller blocks of trading to move the market.  Because of these,  expect more volatility with a slightly negative bias.  Of course a surprise Fiscal Cliff deal could pop the thin market in a painful way for any shorts.

MARKET SENTIMENT

Yesterday’s selloff brought a little life back to bears and made bulls a touch nervous.  But all the failed breakdowns recently sound a bit like Chicken Little and many traders are paying less attention to them.  You could same some complacency is creeping into the markets and that is never a good thing.  Traders seem more hopeful of a Fiscal Cliff deal than fearful of gridlock.  And fundamentally they are right about not reaching a Fiscal Cliff deal by the end of the year since most of it can be unwound retroactively.  But that discounts the emotional selling from the average retail investor who has been spooked by the 24/7 coverage of the Fiscal Cliff.

TRADING OPPORTUNITIES

If we think about the market like a spring, the recent rally unwound the upside potential and it is getting a bit stretched at this point.  Further, the downside spring is more coiled that it has been in a while.   While my medium-term bias continues to be positive once we get past the Fiscal Cliff debate, supply and demand might dictate some temporary weakness.  This is not a sure thing, but just something to keep in mind if you see some down days over the next couple weeks.  The Fiscal Cliff could spook the market, but it won’t crash the market.

How to trade the coming days, longer-viewed traders should hold positions through the weakness.  Swing traders should lighten up and look for better prices to buy in at and shorts should be extremely careful because the market could pop at any moment if our politicians actually do their job and compromise for the sake of the country.

INDIVIDUAL STOCKS

AAPL is trading lower, extending yesterday’s slide.  This is a volatile name and speculators are driving this thing all over the place.  Up, down, up, and down again.  Day and swing traders should lock in profits quick on this name because it will reverse on a daily basis.  But longer-viewed holders just hold tight.  The key to making money in the markets is buying right.  And if you bought right, you should be okay with this volatility.  If anyone wants to get in on this trade, wait to buy the dips, don’t chase the rallies.

Stay safe.