AM: Volatility continues

AM Update

The S&P500 fell under 1500 this morning, but has since found support.  While nerve-wracking  this volatility is building support for the continuation.  AAPL is finding strength, but I remain suspicious and would be a seller if the stock breaks into the gap.  NFLX is holding its own and FB is at an interesting place.

MARKET BEHAVIOR

Volatility continues as stocks dipped under 1500, but the market found a floor in late morning trade and is back above this key level.

MARKET SENTIMENT

This sideways churn is changing the ownership base as nervous holders are selling to confident ones.  Is this smart money selling to dumb money, or the other way around?  Only time can tell for sure.

Maybe this is just selective hearing, but it sure seems like the only opinion I regularly hear  is “everyone is too bullish”.  I’m sure there are a lot of bulls are out there, but the cynics seem even more numerous, or at the very least more vocal.  But I could be mistaken too.  We tend to notice things more once we are a member of a certain group.  For example when a person buys a car, suddenly they notice that same model all over the place.  When we take a bearish or bullish position, we have to be careful we don’t selectively filter our view of the world to confirm this bias.  A bull often sees nothing but bearishness and a bear sees nothing but bullishness.

It seems the widely held belief is dumb money is long this market and smart money is waiting for the pullback.  Through the lens of supply and demand, smart and dumb lose their meaning and the only thing that matters is size of each constituent.  Professional money managers are typically labeled smart money, but they are also the largest players.  I’m far more nervous when all the smart money is doing the same thing because they hold all the chips.  If this rally continues and “smart” money is forced to chase, it will lead to a fairly spectacular, and profitable, rally.

TRADING OPPORTUNITIES

Expected Outcome:
The market is retesting support at 1500.  Another bounce here will make the market even stronger because each dip flushes out weak hands.  While it has been a wild ride, the last few weeks have been constructive and suggest a sustainable continuation.  If the market holds 1500, today’s dip is buyable.

Alternate Outcome:
The market could be on the verge of running out of dumb money and this entire thing is about to collapse.  Obviously I don’t buy into this widespread view, but I also recognize I can be wrong and that is why we always trade with defense in mind.  1500 is clearly the line in the sand and any dip under it will cause me to reevaluate my bullish thesis.  Without a doubt this market will pullback, it is simply a matter of when.  This constructive price-action combined with the widespread cynicism  is telling me this is not that time.

INDIVIDUAL STOCKS

AAPL continues the whipsaw between $465 and $455.  In my mind this is the exact opposite trade we are seeing in the S&P500.  The indexes are consolidating for a continuation higher and  AAPL is consolidating for a continuation lower.  This sideways trade is calming nervous holders and giving them hope they will get some of their money back.  It wouldn’t surprise me to see AAPL jump back into the $465-$485 gap, but any strength should be sold.

NFLX made a fresh high this morning, but gave it up and is trading back under yesterday’s close.  The stock found support at $178 by mid-morning and buyers are willing to step in here.  It will be a wild ride, but the stock still wants to go higher.

FB is finding support at the 50dma, a high-volume bounce off this level would be an interesting entry.  Most of the bullishness from the IPO has worn off and the stock is up over 50% from recent lows.  I’m not sold on the long-term prospects for FB, but it makes an interesting trade if it finds support here.  Wait for the bounce confirming support and don’t jump in early because this could just as easily fall through a trapdoor.

Stay safe