LA: Light volume trade be misleading

S&P500 weekly at end of week

Look Ahead

MARKET BEHAVIOR

Markets were positive last week, but finished on a sour note after Friday’s selloff.  The big question is if the market will continue the weekly trend higher, extend Friday’s slide, or the third option, a bit of both, further weakness before rebounding higher.

MARKET SENTIMENT

The holiday-shortened week will see light volume as most big-money managers are on vacation.  Obviously these guys cannot closeout their positions before leaving, so to manage risk their only alternative is leaving stop-losses to protect their portfolio.  Some of these are electronic, others are junior traders stuck manning the desk through the holidays.  But while the junior traders have the authority to sell shares if the market hits predetermined stop-loss triggers, these young traders don’t have the same authority to initiate new buys.

What makes this noteworthy is it creates an imbalance with sell triggers piled around key technical levels but very upside catalysts where automatic buying will take place.  The light volume also increases the opportunity for volatility because smaller orders carry more weight and can move the market. It could make for an interesting week with a slight negative bias.  But often these holiday week moves are not fundamentally driven and do not stick once the decision makers return to work.

TRADING OPPORTUNITIES

The lack of massive selling last Friday on the Fiscal Cliff breakdown, shows the market is not spring-loaded to the downside.   This is encouraging news for bulls looking to buy this market.  We could see some carry over from Friday’s selloff, but barring panic induced selling, we are close to the bottom.  As I shared above, the holiday week could result in a negative bias, meaning we might wait to buy until the back half of the week to see how things develop.  We could easily see the market take off on light volume, but we could also see it plunge if stop-loss selling kicks in.  But either way expect the market to stall after the initial flurry of orders is filled.

I continue being constructive into next year as the market stops worrying about the Fiscal Cliff and a lot of this new money from special dividends and 2012 tax selling gets pumped back into equities.  Even longer-term there is huge upside potential as money starts flowing out of bonds and back into equities.

AAPL weekly at end of week

INDIVIDUAL STOCKS

AAPL is the exception where I expect there are many automatic buy-orders near the $500 level with big money itching to get back in the stock near these lows.  If there is weakness in the markets, we could see AAPL find a floor near $500 as junior traders are under orders from their bosses to buy any time AAPL dips to $500.  For those holding the name, this could provide some downside protection.  Of course breaking $490 and all bets are off and you’ll see a lot of stop-loss selling punish the stock.

Some people criticize my analysis because I lay out two different scenarios.  But the truth is I don’t have a crystal ball and I cannot know for certain what the market will do in the future.  I trade the higher probability, but even low probability events happen on a regular biases   I am always considering multiple outcomes so I am prepared for whatever the market throws at me and I know how to trade different situations.  In AAPL’s case, I expect to find support at $500 and the stock is buyable here, but dip under $490 and expect a wave of stop-loss selling to punish the stock.  How a person trades that cascade of selling depends on their timeframe and holding period.  But having a plan at $490 helps alleviate some of the fear and doubt that inevitably happens when a trade moves against us.

Stay safe