PM: Rest day

PM Update

MARKET BEHAVIOR

Stocks closed modestly lower on elevated volume, snapping a monster two-day win streak.  We are resting just below the 1460 level that proved too difficult to break through last Fall.  Will this time be different?

MARKET SENTIMENT

Elevated volume today shows a lot of people were selling the 65-point rally, but declines were modest as new buyers were just as willing to step in at these higher levels.  Is this smart money selling to dumb money?

We squeezed past the Fiscal Cliff, but that wasn’t convincing enough to win over the pessimists who are now fretting about something else.  Attitudes and expectations about the future change slowly and one event doesn’t move the needle much.  The biggest difference between this week and last is the market is 65-points higher.   Rock solid value buyers bought the dip and are now selling to flighty momentum chasers.  This shift in ownership will add to coming volatility.  What was a coiled spring at 1400 is now mostly unsprung.  Anyone buying up here is chasing the market and chances are it will end badly.  We might see a little more upside just because too many people are expecting a pullback, but more often than not these big gains see a step-back before resuming higher.

TRADING OPPORTUNITIES

Expected Outcome
Longer-term holders should sit tight, just expect some near-term volatility as we digest these new gains and the market’s attention shifts to the next impending crisis.  Don’t let this noise shake your resolve.  Day-traders look for one last short-squeeze and hop on.  And swing-traders keep your powder dry until we see a convincing point to jump in.  The reason to remain cautions is we might not see the last short-squeeze, so the odds are not very favorable for swing-trading it.

Over the near-term I expect a pullback to 1425 before value investors feel like they are getting their money’s worth and willing to buy this market.   But expect headlines shouting doom and gloom when we do pullback.  It is never easy to buy the dip and it won’t be any different this time.

Alternate Outcome
There is a good chance my calls for a pullback are premature since this is such a widely held opinion.  This is why I expect one last pop before this rally fizzles, but I could be underestimating the size of the imbalance remaining in the market and the rally could go further and longer than just a short-squeeze.  But if this is the case, we’ll know soon enough when the market isn’t breaking down and we have time to adjust our positions.

INDIVIDUAL STOCKS

Broad market weakness weighted heavily on AAPL today as it declined 1.3%.  The silver lining is the light volume shows not many people were selling and it was mor a lack of buying after a big run that lead to the weakness.  It would be perfectly reasonable and healthy for the stock to close the gap, so don’t let additional weakness spook you.  AAPL’s quarterly earnings are coming up in a couple of weeks and no doubt that will be the catalyst for the next move.  The gap between the bull’s opinions and that of the bears is just too wide for the stock to remain unchanged after earnings.  Between the lowered expectations and AAPL’s tendency to surprise the market, we could see a pop.  With as much selling as the stock has seen in recent months, there isn’t a lot of downside left in the name.  Strong upside potential with limited downside seem like a good setup for a trade.  There are no guarantees in the markets, but this one deserves a look.

Stay safe