PM: Much ado about nothing

MARKET BEHAVIOR

The market was all over the place Wednesday.  Broke below 1400 in early trade, popped above 1415 in afternoon trade, and ultimately closed near break-even   Today’s price action did a good job humiliating bears and bulls alike and the multiple head-fakes triggered the strongest volume we’ve seen in a while.

For all the excitement, we are still suck between 1400 and the 50dma and today’s move didn’t shed much clarity on where the market is headed next.

MARKET SENTIMENT

Bears were sucked in with an early selloff, but were squeezed out a couple of hours later as the market surged higher.  Bulls jumped all over this rebound, but were ultimately let down as the market soldoff into the close.  What does this mean?  The market is still emotionally charged and short-term traders are trying to jump ahead of the next move.  These aggressive and premature traders are the source of this volatility and the market probably needs to marginalize these traders before the market can reveal its true intentions.  A couple more wild days like today will convince many of these short-term traders to stay away for a while.  Once they are out of the picture, the market will make its next move.

TRADING OPPORTUNITIES

Today’s move chased out a lot of weaker hands on both sides and there is a strong possibility the next move outside the 1400 to 1415 range will signal the market’s near-term intentions.  Or it could be just another head fake intended to humiliate and demoralize all the traders trying to jump ahead of the market.  This whipsaw selloff very well could have refreshed the rally and made room for further upside progress, it could also be the last gasps of the rally before nosing over, or it could be the just the start of a volatile trading range.

On this blog I often talk about high-probability trades, but right now a valid and solid case could be made for a move in either direction.  Pessimism remains at elevated levels and most traders expect us to fly off the Fiscal Cliff, meaning it is already priced in.  But at the same time the market rallied on hope that the Fiscal Cliff wouldn’t be such a big deal and we have corrected very little since negotiations in DC started bogging down.  This is turning into one of those situations where the probabilities are fairly well-balanced, making it nothing more than a flip of a coin.  To make money we need to see more of an imbalance and extreme in sentiment and we just don’t have that here.  At times like these it is best just to sit on cash and wait for more information.  The biggest mistake most traders make is needing to be in the market nearly all the time.  If you don’t have an edge on the market, take a break and go fishing.

INDIVIDUAL STOCKS

AAPL was pounded relentlessly today.  This is what happens when a stock is over-owned and someone yells fire.  AAPL closed down 6.4% on no news as investors climbed over each other trying to get to the exits.  Lets be clear, AAPL is not a GMCR or NFLX with an astronomical and unsustainable valuation based on outrageous growth expectations.  But AAPL does suffer from being one of the most owned stocks in the world and it has run short buyers.  Blame it on tax increases next year, Android, supply chain issues, or whatever else people are talking about.    But the truth is everyone who wants some AAPL already has some AAPL and there is no one left to buy shares from the guy who wants to cash in.  It is anyone’s guess how far this selloff will go, but unlike other bubble stocks, AAPL is the real deal and it isn’t about to implode in on itself.  If anything, the street is under appreciating its growth, cash flows, and profit margins.  We might see a double bottom form, but recognize over the near-term this stock has transitioned from investment grade to trading material.  Expect the stock to remain volatile until we have concrete fundamental data out of the company, most likely the Q4 earnings.  Until then trading AAPL will just be legalized gambling.

Stay safe