AM: Bouncing back

S&P500 daily at 2:29 EST

AM Update

Stocks bounced back on positive data, but are still shy of all-time closing highs.  AAPL is resting, but this is supportive of the recent bounce.

MARKET BEHAVIOR

Stocks gapped higher at the open following encouraging data, but traded sideways around 1560 all morning.  The extents of the current trading range fall between 1538 and 1565.  Today’s strength brings us closer to the upper end of the range, but the market still struggles to find buyers willing to push it above all-time highs.

MARKET SENTIMENT

Given the rise in homebuilder stocks, strength in home prices shouldn’t surprise anyone and the market saw this coming for a while.  Same goes for gradually improving manufacturing data.  These do discredit bears’ claims the economy is slowing, but given the market’s strength the last few months, this negative opinion is increasingly in the minority.

Sideways trade here is constructive, but it will likely be a quiet week due to the holiday and quarter end.  Big money is largely positioned how they want to end the quarter (window dressing) and are just coasting this last week.  Next week is when they get back to business and look at the market with a clean slate.  Without pressure to chase, will they keep buying?  We’re days away from learning the answer.

If the market is running out of buyers, it should happen pretty quick.  Continued sideways trade shows buyers are stepping up and supporting prices.    1545 is the level to watch.  A dip under here is more worrisome for bulls than a pop above 1565 is for bears.  This far into the rally gains are harder and harder to come by and dips are increasingly more likely.  No one has a crystal ball, but we can trade probabilities.  History tells us we should expect multiple 5% pullbacks each year, each quarter often has a different personality, and every rally must end.  On the other side, it also tells us rallies often go far longer than anyone expects.

TRADING OPPORTUNITIES

Expected Outcome:
The challenge for a savvy trader is not selling too early, and at the same time not holding on too long.  We aim for the sweet spot between these two common made mistakes.  Hold when everyone is talking profits and sell when everyone is holding for larger gains.  This sweet spot is a region, not a point and we need to decide what is good enough.  We cannot sell the top, so either we are late or we are early.  Many retail investors try to sell late because the logic goes holding past the top lets a trader continue riding prolonged rallies higher.  And it makes a lot of sense, but I’ve never seen an interview with a successful trader who uses this strategy and almost all say they sell on the way up.  Do we want to model ourselves after the average retail investor, or the elite trader?

Either way, the market is looking for direction here.  We cannot trade between 1550 and 1560 indefinitely and a resolution is imminent.  The trend is higher and it is often smart to stick with what is working.  Of course every rally ends and this one has been around the block a few times, putting it closer to the eventual pullback.  If a trader doesn’t have conviction here, the best trade is no trade.  Simply sit this one out and wait for a better setup.

Alternate Outcome:
Everyone continues holding on for new highs.  This limits supply and is propping up the market.  As long as supply remains tight, the market can continue higher.  The bigger question is how much higher.  20-points on a 200-point rally is fairly trivial.  100-points is a major continuation.  Between the changing quarter and lack of short-squeezes, sentiment is changing.  Bearish expectations over the last three-months enabled this rally, but if people come into the second quarter with a different outlook and portfolio, should we still expect the market to keep acting the same way?  The alternate outcome is a continued rally, but it has to prove itself.  Making and holding all-time highs through next week will do a lot to prove the sustainability of this rally.

AAPL daily at 2:29 EST

INDIVIDUAL STOCKS

AAPL is taking a break after a strong performance early Monday morning where the stock traded up to $470.  There was a lot of momentum and short-covering in that move, but that demand quickly evaporated and the stock retreated back to the low $460s.  Finding support at $460 suggests this near-term up-trend will likely continue for a little while longer.  $485 remains the level to watch, but the $500 is even more significant since that provided rock solid support for three-months.  The stronger a support level, the more challenging resistance it poses.  This is because many traders had the opportunity to “buy the dip” around $500 and most of these traders are simply looking to get out at break-even when the stock returns to their purchase price.  Traders selling to get their money back will keep a lid on prices once the stock challenges previous levels of congestion

Stay safe