AM: Embrace the pause

AM Update

The market is trading sideways at 1500 and AAPL’s early rebound is filling owners with new hope.

MARKET BEHAVIOR

The S&P500 dipped under 1500 in early trade, but recovered that psychologically significant level by midday.  A bit of sideways trade is constructive for a continuation.  The market has seen few down-days this year and a little distribution and profit taking should be expected, even welcomed.

MARKET SENTIMENT

The market isn’t worried about much here.  The only negative story making headlines is AAPL’s collapse, but that damage is contained and largely a single stock event.  Complacency is always something to be wary of, but it isn’t enough to bring the market down by itself.  It isn’t complacency that tops out the market, but investors being fully invested when they feel comfortable.  Running out of new buyers is the underlying structural event that causes complacent markets to peak.  So while complacency is creeping in here, many investors who sold toward the end of last year are not fully reinvested yet and it is their buying that is holding up this market.   It takes time for these sideline watchers to be won over and buy back in and we are still in the middle of this process.

TRADING OPPORTUNITIES

Expected Outcome:
The market probably needs a couple down-days as part of the two-steps forward, one-back.  This is the process of moving forward and don’t let modest weakness spook anyone.  For those that are holding, they can keep holding.  For those looking for a place to get in, wait for some weakness, but don’t wait too long because the dip will be shallow and quick.

Alternate Outcome:
A move above 1505 says the market is ready to keep going.  Of course a sharp advance on gigantic volume would likely be capitulation and signal a near-term top, but a more casual move above 1505 is putting the squeeze on shorts and pressuring those watching from the sidelines.  This is a chasing rally and as long as traders are watching from the sidelines there will be fuel to propel this market higher when they start buying back in.  We also need to be wary of a confidence rattling headline, but so far the market is pretty happy with the world and not too worried about last year’s headlines.

INDIVIDUAL STOCKS

AAPL bounced back from early weakness and recovered $450.   We might even see the stock come up even more, but don’t be fooled, this is just a dead cat bounce to squeeze late shorts and keep hopefully owners holding on.  Anyone looking for a V-bottom is going to be disappointed.  Sharp bottoms form in over-sold stocks like we have in AAPL, but they also require an unexpected catalyst that decisively reverses the trend.  With the next earnings report three-months away, it will be a long time before we get another actionable catalyst   Further, at this juncture the market is no longer impressed with earnings out of AAPL and it needs to see something new to bring the stock back to life.  The market has clearly decided AAPL is a mobile phone company with increasing competition from Samsung on the high-end and low cost-rivals on the other end of the scale.  The market already expects strong phone sales, new phone models, and some kind of dividend/buy-back.  None of these events will reinvent the company or stock.  If anyone thinks AAPL will come back just because it is a great company will be waiting a long, long time.

I know many people are reluctant to sell AAPL here, but at least put a plan in place.  Pick levels above and below where you will sell the stock and stick to these.

Stay safe