PM: Fiscal Cliff rally

PM Update

MARKET BEHAVIOR

Stocks had the best single-day gain in over a year and we have to go back much further to find a comparable two-day move.  Volume was the highest in a few weeks, as we easily cleared the December highs and are less than 1% off a 52-week high.

MARKET SENTIMENT

Clearly bears fueled this surge because fundamentals were not a factor in this move.  The world is not any better today than it was last week, it just isn’t as bad as some were predicting.  WIth the Fiscal Cliff is behind us, we can start obsessing about the next big catastrophe and right now the leading contender is the Debt Ceiling.  Who knows, maybe at some point earnings will matter again, but probably not in the immediate future.

As we discussed last week, the asymmetric trade was to the upside, but even I didn’t expect something this strong.  This is what happens when too many people think alike and position their portfolio the same way.  Everyone expected the market to crash as we plunged off the Fiscal Cliff and they traded this opinion ahead of time.  But the nature of supply and demand created a unique opportunity with limited downside and a huge 65-point two-day rally as the upside.  The news doesn’t matter nearly as much as understanding how other traders are positioned.  If all the sellers sold last week in anticipation of the Fiscal Cliff selloff, supply dries up and the market heads higher.  Add in a little good news and the market explodes higher.  But remember, the market is a spring, the 65-point rally pushed things pretty far and there is not a lot of upside left in this spring.  Much of the buying has already happened and it will take a new catalysts to bring in a fresh crop of enthusiastic buyers.

TRADING OPPORTUNITIES

Expected Outcome:
The market finished at the highs as it continued squeezing bears.  This might continue for a couple more days, but it will be hard for serious value investors to buy a 65-point, two-day rally and they will wait for the pullback.  As soon as bears are done covering their shorts, demand will slack off and there will be a modest pullback.  Be careful of chasing the rally at this point since most of the move is already behind us and anyone buying here is late to the party.

Alternate Outcome:
The market could continue driving higher as we set new 52-week highs.  Some bears are desperately holding on, praying for a pullback to let them get back some of the money they lost.  As long as these guys are hanging on, we can keep heading higher as they continue getting squeezed out.  But holding out for top dollar is a fools game and traders should be willing to lock in profits early and start looking for the next high-probability trade.

INDIVIDUAL STOCKS

AAPL joined the market’s rally, but it simply matched the market’s gain and didn’t have a big beta move.  But any AAPL bull should appreciate this restraint because the faster they rise, the harder they fall.  A measured rally is a sustainable rally.  AAPL is approaching the 50dma and this could provide some upside resistance that will eventually turn into support.

Stay safe