AM: Modest selling

AM Update

Modest selling after making a new high.  AAPL is still searching for a support.

MARKET BEHAVIOR

Stocks gave back some of yesterday’s gains in early trade, but are finding support around 1525.

MARKET SENTIMENT

This weakness is actually supportive of a continuation because it shows the market is still skeptical and chasing is not getting out of hand yet.  The trend to this point has been breakouts followed by sideways trade.  If the market holds these levels for a few days, look for another new high next week.

Yesterday’s surge into the close was largely driven by short covering and by itself is a temporary source of buying.  Now that shorts have covered, we need to find new people to buy this market.  Today’s restraint shows many traders still on the sidelines are holding back.  We will be close to the end when this dam of restraint finally breaks and buyers fight each other to get in the market.

Looking at the calendar, there are five-weeks until the end of the quarter.  Big money managers underweight this market and overweight AAPL are getting nervous, but they are hoping the expected market pullback and AAPL rebound will save their quarter.  They still have time to move into high-beta stocks to catch the market if they need to and the pressure won’t really set in for a couple of weeks.  Desperate money piling into high-beta stocks will cause some fireworks.  Of course the above scenario only applies if we keep making new highs into early March.

TRADING OPPORTUNITIES

Expected Outcome:
While we need to exercise restraint here, the trend is still higher.  This is the time to be collecting winners, not initiating new positions or going short.    Each trade has a different risk profile and a good time to take profits is not automatically a good time to put on shorts.

The market is retesting support at 1525, which is normal and healthy.  If we hold this level for a few days, an aggressive and nimble trader could buy back in and squeeze a little more upside out of this market.  But for the average trader, its been a good run and there is not much left in this move.  We could continue up to 1550, but the risk of melting down increases by the day as the supply of available buyers is used up and lack of demand could trigger a larger wave of selling.  Is another 20-30 S&P500 points worth the risk?  For some yes,others no.

But that is the trade as it stands right now.  A modest dip and sideways trade for a week or two clears the way for a continued move higher and that is buyable for most traders.  I don’t know what the market will do and simply look for the best trade at any given time.  Today it is cautious optimism and restraint, but that could change next week if big money keeps buying every dip.

The hardest part of trading is selling winners on the way up and very few people trade this way.  But if most people don’t make money in the market, maybe we should consider using a different strategy than everyone else.

Alternate Outcome:
If the expected outcome is a little more upside, the alternate is an imminent collapse.  The sequestration fight is heating up and could take the air out of this market any minute now, but I don’t expect it.  Anyone who sold/shorted the Fiscal Cliff lost a lot of money and they are not about to repeat the same mistake here.  In fact, I’m wondering if we are seeing some buy-the-rumor, sell-the-news here as the market is rallying into an expected budget deal.  What is the least expected outcome?  A market selloff on a budget deal, and that is why we might actually see it.  This is pure speculation at this point, but the closer we get, the more clues we will have about the market’s intentions.

INDIVIDUAL STOCKS

AAPL’s sell-the-news keeps on selling as the stock dipped under $450 this morning.  This is no longer a fundamental story, it is a supply and demand trade.  It doesn’t really matter what Apple the company does here, the stock is stuck in a rut because it cannot find new buyers.  This is the most widely owned stock by both retail and professional investors.  This means everyone who wants some already has more than they need, and beyond just a lack of demand, this also creates a huge pool of potential sellers.  Gigantic supply of potential sellers and small pool of available buyers is why this great company’s stock is down 35% in just a few months.

NFLX is seeing a little selling pressure here.  After running up nearly 100% since earnings, a pullback to $160 should be expected.  I’d still be afraid of shorting this stock because it is so heavily shorted it could pop 10% at any moment, but holding a long here is getting greedy.

AMZN put the hurt on more bears as it traded up to $275, but that squeeze didn’t last and it since pulled back to $270.  So far the stock looks like it wants to set a new high above $285.  What cannot go any higher usually keeps going higher.

Stay safe