PM: Finding a floor

PM Update

MARKET BEHAVIOR

Stocks sold off after Fiscal Cliff negotiations bogged down.  The encouraging sign is the market didn’t collapse after the initial hit and managed to close above the lows.  Between the weekend and Tuesday’s holiday, there are fewer opportunity to trade changes in sentiment if the Fiscal Cliff situation evolves over the weekend.

Volume was huge, almost 50% higher than average as a flurry of stock changed hands between the headlines and options expiration.  Much of the trading was market makers unwinding positions and day traders and high-frequency traders taking advantage of the news driven volatility, but there was also some real trading as fair-weather holders transferred shares to braver value investors.  If these new owners are more committed to holding, it should soak up supply and calm the markets.

MARKET SENTIMENT

Traders had the opportunity to punish the market, but selling abated in the afternoon.  We found support and bounced near 1422, ultimately returning to 1430.  Obama left for Hawaii and most of Congress went home, so we probably won’t see new developments from the Fiscal Cliff until after Christams.

Personally I think the market has been too obsessed with deal or no deal and little attention paid to what the deal might look like.  Take Boehner’s offer and Obama’s offer, split the difference and see how that looks.  If we are okay with that level of austerity, then the market is a buy here.

TRADING OPPORTUNITIES

If the market finds a bottom on the heels of a Fiscal Cliff meltdown, there is not much left to break this bull.  Monday will be a throwaway day on extremely light volume.  It will be hard to get a good reading from that price action and we will need to see a confirmation later in the week to validate either support or continued slide.

I continue my bullish inclination and seeing the market hold up next week will confirm those views.  If the market finds support it becomes a good buy into next year.  The interesting thing to watch will be how the markets move in the time leading up to the Fiscal Cliff resolution.  If the market rallies into a deal, then we might see a sell the news trade develop.  If the market remains cynical and stays flat, we could see it rally on a deal.  Either way our trading strategy evolves as the sentiment in the market changes.  It is not about being a perma-bull or perma-bear, but trading the hand we are given.

INDIVIDUAL STOCKS

AAPL showed strong resilience in the face of the market’s headwind by finishing at the top of the day’s range.  A lot of nervous holders were flushed out of the name in the selloff and the new crop of resolute owners brought stability back to the name.  I’m not sure when or if the stock will break $700, but there is plenty of upside without making new highs.  AAPL’s buy and hold days might be behind it and it will likely take rangebound strategies like swing trading or selling options to continue making money in the stock.

Stay safe