PM: Fiscal Cliff plunge = rally?

S&P500 daily at end of day

PM Update

What was the least expected price action today?  That is exactly what we got.  Markets don’t move on fundamentals or technicals, they move on supply and demand.  Run out of sellers and markets rally, cliff or no cliff.

MARKET BEHAVIOR

Stocks were up 1.7% on the final day of the year.  The market opened lower, but rallied through the day on Fiscal Cliff hopes.  This put the hurt on bears as the obvious Fiscal Cliff collapse turned into a monster rally instead.

MARKET SENTIMENT

A lot of traders were positioned for a Fiscal Cliff collapse and this rally caught them by surprise.  People pay too much attention to the news and not enough to how other traders are positioned.  Deal or no-deal, the Fiscal Cliff is a drag on the economy, but if you trade the fundamental story, you would be on the wrong side of this trade.  This is because markets respond to supply and demand, not fundamentals or technicals.  Everyone saw the Fiscal Cliff coming from a mile away and sold ahead of it.  There is no supply of new sellers remaining, thus we rallied in spite of the headlines.

Speaking of headlines, lawmakers have a couple more hours to strike a deal and avert the cliff, but this focusing on the wrong thing.  We are obsessing over “deal or no-deal”, but this isn’t a binary event.  A deal doesn’t save us and no-deal doesn’t ruin us, but that is the way people are trading it.  Once we are past the deal/no-deal hoopla, the market will move its attention to something else.  Maybe that is the ramifications of the compromise, maybe it is Europe, or maybe something entirely new.  Remember every ECB meeting or employment report from last year that was supposed to “make or break the market”?  The Fiscal Cliff will be just like that, hours later and it will be ancient history.

TRADING OPPORTUNITIES

Expected Outcome:
Most of the selling already happened and the high probability trade is to the upside.  All the sellers have sold and supply is drying up.

Alternate Outcome:
Within hours of the New Year and we still don’t have a deal.  When markets open on Wednesday, that could pressure prices, especially since we had a strong short squeeze Monday.  But even renewed weakness presents a buying opportunity because the market is so overly pessimistic and most of the weak hands have already sold.

AAPL daily at end of day

INDIVIDUAL STOCKS

The strength of the indexes was only out-shined by the monster run AAPL had, up nearly 4.5%.  This stock is finding buyers and running out of sellers, a recipe for higher prices.  It won’t be a smooth ride because there is a lot of overhead supply to work through, but the stock has probably seen the lowest of the lows.  I’m not an AAPL bull by any stretch and think they will see real competition from Samsung and Microsoft next year, but the stock was oversold and presents a great buying opportunity as we will probably see $650 this year, maybe even before summer.

Stay safe