AM: Bounce continues

AM Update

MARKET BEHAVIOR

Stocks set a new post-election high in early trade as the bounce off the 50dma continued.  Over the last two months we found decisive bounces off 1350, the 200dma, and now the 50dma.  Anyone standing in the way of this rally had a really bad month.

MARKET SENTIMENT

It is impossible to argue with this market, either your are on board, or you are getting killed.  By now now the uptrend is so obvious, former bears and those on the sidelines are changing their tune and buying into this Teflon rally.  If you can’t beat them, join them and buying from all these turncoats is the fuel propelling this market higher.  Bears have argued this market is too optimistic, but it only gets more bullish with each passing day.  The mistake most people make is assuming the contrarian trade is going against a big move.  But contrarian trading has nothing to do with price-action and everything to do with what the market is thinking.  More often than not the contrarian trade is going with the market, not against it.  When too many people say things have gone too far and are primed for a pullback, the contrarian trade is to keep holding.  The Q1 rally earlier this year is a perfect example of this.  For months people were predicting and expecting a pullback, but it never happened and the market kept marching higher until all the sideline-sitters were forced to act or else risk being left behind.  It was the buying by these reluctant buyers that market finally topped because after that we ran out of new buyers and the 2nd quarter selloff started.

TRADING OPPORTUNITIES

What happens after a Fiscal Cliff deal largely depends on what the market does before.  If we keep rallying strongly in anticipation, that increases the likelihood of a sell-the-news event.  The market is also currently obsessing on when a deal is reached, not what is in the deal.  We could pop on the first reports of a deal, but then selloff as the actual details of the deal are dissected.

For short-term traders, start looking to lock in profits soon.  This could run a little more, but expect buying to climax and turn lower.  For longer-term holders, the market is in rally mode and don’t mind pullbacks here an there, they are simply part of the process of heading higher.  The world is getting better not worse and long is the right side to be on over the medium term.  Ignore everything people are worried about and instead fear the things no one is talking about.

INDIVIDUAL STOCKS

AAPL is continuing its bounce off of $500 and putting more margin of safety between itself and this key psychological level.  A lot of times it is easy to spot a good value opportunity, the harder part is figuring out when to take advantage of the discounts.  A lot of people thought AAPL was a bargain at $650, then it was $600 and $550 after that.  But this gets back to what we were talking about yesterday, if you are tempted to buy something, it is probably still too early.  If you want to buy a stock on the dip, wait a little longer and the price will get even more attractive.  The time to buy the dip is when everyone has given the stock up for dead, when they are convinced it will keep going lower.  And that is AAPL here at $500.  Too many dip buyers were burned by buying higher up, and have since given up trying to pick the bottom.

Stay safe