AM: Market bounces back, AAPL sellsoff

AM Update

The market bounced back from early weakness for the third day in a row, showing bears are struggling to recruit new pessimists needed to drive the market lower.  AAPL is downgraded and dips under the overly-followed $500 level and triggers a wave of autopilot stop-loss selling.  But chances are this is a short-lived event.

MARKET BEHAVIOR

Stocks opened weak, but are recovering in mid-morning trade.  We dropped to 1463 before bouncing back.    While the day is still negative, it is encouraging to see the market find a floor and the early weakness didn’t trigger a larger wave of selling.  This was the third day in a row bears tried to break the market but were rebuffed just hours later.  Bull markets often see early weakness followed by late strength, and that is exactly what we have here.

MARKET SENTIMENT

It could be assumed early weakness is driven by active traders trying to get a head start on the expected pullback.  But this smaller group doesn’t have sustaining power and their selling pressure quickly fizzles after they fail to induce other holders to join the selling.

This pattern is encouraging because it shows the larger group of holders willing to hold through some weakness.  This makes sense because all the negative headlines are already out there and anyone afraid of this market is not holding stocks.  This means those that are holding here are doing it in spite of the pessimism and recycling the same old headlines won’t spook them out of their position.  If most holders are taking a longer-term view of the market, that will send stocks higher because their confidence and conviction keeps supply out of the market during any weakness.

TRADING OPPORTUNITIES

Expected Outcome:
Three failed selloffs suggests the next move is higher.  With all the shorts that jumped in the market over the last few days, there is a good amount of fuel for a short-squeeze when we break through 1472.  The question then becomes how to trade the short-squeeze.  Do we hold for further gains, or lock in those profits before demand dries up?  Good question and I really don’t have an answer.  It is never wrong to lock in profits after a nice run, but it is also a shame to jump off a larger run prematurely.  All we can do is evaluate the situation as it develops and make our decision when we get to that juncture.

Alternate Outcome:
There are a lot of new buyers that jumped in after the market passed 1450 who would be in the red if we fall under this key technical level.  Expect a dip under this widely followed level to trigger a wave of selling that could push the market down to the 50dma.

INDIVIDUAL STOCKS

AAPL makes headlines again as the stock falls under $500 and hits a low of $484.  Obviously AAPL is the next NFLX and GMCR.  This is clearly another case of a high P/E stock that traders put an unrealistic valuation on and obviously the stock’s P/E will contract to more normal levels.  Wait, what’s that?  AAPL’s P/E is already well below that of the S&P500?  How can that be???

Okay, sarcasm aside, reports of AAPLs or Apple Inc’s death are greatly exaggerated.  Today’s weakness is nothing more than a large wave of auto-pilot stop-loss selling triggered by falling under an overly-followed support level.  Some analyst caused the selloff by downgrading the stock and while his might be unfair, most analysts are analysts because they can’t trade, so why is the market so concerned when one of these guys downgrades a stock?  Trade fundamental news, not one person’s opinion.

In the markets you are either early or you are late.  No one ever top-ticks the market except through pure luck.  Obviously buying and holding AAPL here is early in the recovery, but hopefully any buyers who stepped into this stock knew this was a longer-term trade and were willing to hold through some near-term volatility.  No doubt AAPL could head lower from here, but $485 is the safest level to own AAPL in almost a year.  Just as anyone who bought on the iPhone5 excitement how that worked out for them.

Nothing changed in the AAPL story except the stock got a bit cheaper.  Hopefully traders are not letting some emotional near-term volatility change their rational long-term analysis.

Stay safe