AM: Stocks find some footing

AM Update

Stocks are finding their footing after recent weakness.  The longer we hold these levels without breaking down, the more supportive it is for a continuation of the rally.

MARKET BEHAVIOR

Stocks are clawing their way higher after recent selling, regaining the 1460 level and adding to the cushion above support at 1450.  The thing to be aware of is the large number of automatic buy-orders above recent highs of 1470 and sell-orders under 1450.  Right now we are comfortably in the middle of this range, but expect a decisive break once we move out of this consolidation.  The longer we stay within it, the stronger the reaction will be.

MARKET SENTIMENT

Traders are still trying to come to terms with this rally.  It is hard to find anyone with something good to say about the world, in fact the leading reason bulls use to justify buying this market is that it is going higher because there is not much else for them to hang their hat on.  Since we profit from price movement, not fundamental data, bulls have a valid point here.

It is tough to embrace this market, but that is what makes it buyable here.  Pessimism remains the rule and we are a long way from complacency.  A lot of people confuse contrarian investing with going against the trend, but that isn’t right, contrarian investing is going against the popular opinion.  In many cases the contrarian trade is going WITH the trend when everyone doubts the sustainability of the trend.

Fundamentals will eventually catch up with the market, but is that bearish or bullish?  There is a lot of fear surrounding the economy and politics, but I cannot think of one important indicator that is declining.  Employment, GDP, political compromise, and other hot button issues are all trending in the right direction.  It might not go as fast as most hope, but recoveries rarely do.

TRADING OPPORTUNITIES

Expected Outcome:
We continue holding the Fiscal Cliff gains, building more support for these levels with each passing day.  Most of the profit taking and short-selling has happened already, yet here we stand.  The bears had a couple of opportunities the last few days to drive this market lower, but they failed to trigger follow-on selling.  All of this signals the likelihood of a continuation.  Maybe this next leg higher will be short-lived, or it will be part of a larger move, it is too early to say.  We will need to sample trader sentiment and positioning as it develops.  A steady crawl higher is sustainable, a spike on high volume that quickly fizzles is most likely the start of the pullback.

Alternate Outcome:
The market could easily breach 1450 support and trigger a wave of autopilot selling, leading to a follow-up wave of emotional selling, especially if sellers feel justified by some unnerving news story.  Without a doubt the market will correct at some point, the only question is when.  Support at 1450 seems to indicate this is not that time, but that could easily change.  If this were easy, everyone would be rich.

INDIVIDUAL STOCKS

AAPL is selling off modestly but finding support at $520 as big money managers seem willing to support the stock at this price.  How long this can last is anyone’s guess, but the longer we stay near this level the more likely it is we will dip under it.  There are still a couple of weeks before earnings are released and we should expect some choppiness until there is more clarity about sales.  If AAPL exceeds expectations like they normally do, expect a strong pop out of this stock.  But even if earnings disappoint  the stock has sold off and much of this is already priced in.   It would be surprising to see AAPL dip very far into the $400 range unless there were signs of serious trouble at the company

Stay safe