PM: What to look for tomorrow

MARKET BEHAVIOR

Markets finished higher by 0.3% Thursday.  Volume was less than average as traders paused before Friday’s employment report.  We continue trading between the 50dma and 1400, but find ourselves at the upper end of the range, within easy striking distance of an upside breakout.  Of course that also means there is more of room on the downside before we find support at 1400.

MARKET SENTIMENT

Employment numbers will be off slightly due to Sandy’s disruptions, but everyone is expecting that.  The question is how the market will respond to the numbers we do get.  Sandy gives traders a lot of leeway to trade their preexisting bias.  They could say the numbers are disappointing and hit the sell button, or they could rationalize away awful numbers by saying it was just a temporary blip due to Mother Nature.  Either way they have a free pass to trade their bias and we’ll learn a lot about what the market is thinking here.  The other thing to watch for is if the market’s initial reaction is the wrong reaction.  Lately the market has moved strongly after news, but quickly reversed and ultimately sustained a move in the other direction.  Keep an eye out for a similar head fake tomorrow.

Sentiment has been highly bearish surrounding the Fiscal Cliff and it seems few are expecting a last-minute deal.  If that is the majority’s opinion, then it is already priced in.  And honestly, these Fiscal Cliff debates are mostly about what gets cut and who pays more.  It is no longer debating if we get austerity, but who and  what feels the pain.  If we look at it more broadly from a macro-economic view, a compromise will largely have the same effect regardless of who it falls on because austerity is austerity.  The only exception is if they ultimately decide to kick the can down the road and continue the current policy in the name of economic stimulus.

TRADING OPPORTUNITIES

The market is holding up surprisingly well in the face of the political stalemate and near certainty we’ll plunge off the Fiscal Cliff.  If we continue holding up, I’m getting ready to reverse my expectations of a near-term pullback.  I thought there would be an emotional trade lower, but we’re not seeing it and the bearish side of the trade is getting a bit crowded.  It feels too easy to short the market here and you’d have to be crazy to buy this market.  Often the hard trade is the right trade.

As I shared the other day, there are great arguments to be made for a move in either direction.  When we don’t have a clear edge, it is best to let the market make its move and we jump in a little late.  Right now I think the smart trade is to let the market show it’s hand and then jump along for the ride whether it be lower or higher.

INDIVIDUAL STOCKS

AAPL staged a huge upside reversal on the largest volume since the Nov 16th bottom.  The stock probably put in a short-term bottom, and by short-term I mean the next few days.  We could see lower prices, but this volatile trade is flushing out most of the nervous AAPL holders and in their place far more confident buyers are stepping in.  Anyone buying here isn’t going to be scared by a pullback here or there.  They are in this for a longer-term trade and willing to hold through some volatility in order to get the profits they expect once some sanity returns to this name.  It will be these new owners who bring stability and take supply off the market, clearing the way for a rebound higher.  This doesn’t happen all at once and we could still see some wild swings in coming days and weeks.

Stay safe