AM: Constructive consolidation

S&P500 daily at 1:18 EST

AM Update

Stocks are consolidating after the recent bounce, but holders keep holding and the rally remains intact.  AAPL is making new lows because it cannot find new buyers.

MARKET BEHAVIOR

Stocks opened modestly lower, and are trading around this level by midday.  Tight trade after the last 10-days of volatility is constructive and supportive of these levels.  The 50dma is catching up and the sideways trade let the market rest for its next move higher.

MARKET SENTIMENT

Holders are happy with their positions and not selling, supporting last week’s rebound.  As we’ve seen over last few months, the biggest hurdle isn’t selling, but lack of buying.  Those out of the market remain skeptical and are waiting for this market to breakdown in the widely expected pullback.  But since holders are so comfortable holding, that breakdown hasn’t happened and the market inches higher on tight supply, not widespread demand.

Bears have stop-losses above 1530 and breaking this level will trigger a wave of short-covering.  This pop will further add to the pain underweight investors are feeling.  There are few emotions more persuasive than watching everyone else make money.  This is why smart people throw caution and reason out the window when chasing bubbles to unsustainable heights.  I’m not suggesting this is a bubble, just using that example to show the power the crowd has in winning over reluctant investors.  The higher this rally goes, the harder it is for cynics to resist and that eroding base of pessimists keeps pushing the market higher.

Between confident holders holding and former cynics joining the rally bandwagon, the rally has the perfect recipe for a continuation.  As we’ve seen multiple times, headlines don’t mean anything to this market and we shouldn’t expect negative headlines to break this market.  We all know markets top, but if this one won’t top on bad news, what is left?  Good news.  As crazy as this sounds, I expect this market will top on good news.  Remember, fundamentals and technicals don’t determine market prices, only supply and demand.  What happens is the final piece of good news wins over the last holdouts and we push higher on their buying.  The problem arises when the last holdouts buy the good news there is no one left to keep pushing prices higher and the market finally rolls over.

Of course the other hurdle this market faces is the end of the quarter.  Money managers underweight and trailing the market will be forced to buy in to quarter’s end.  Even if they cannot catch up, they want to at least show their investors they have all the rights stocks in their quarterly position report.  Because of this window-dressing, look for strong stocks to continue going up and weak stocks to keep selling off.

TRADING OPPORTUNITIES

Expected Outcome:
Today’s support shows very little profit-taking and stock owners holding out for more gains will keep supply tight.  New highs are just a few points away and breaking this level will trigger another short-squeeze.  Look for the market to continue into 1540 when chasing will put 1550 in play.

Fear a strong surge fo buying more than a bad headline.  This market will fail on optimism, not the pessimism that has so far failed to dent the rally.

Alternate Outcome:
This choppy sideways trade could be a ploy to suck in the last buyers.  Tops are often volatile as power shifts from Bulls to Bears and we certainly have that volatility.  While there is often one last push higher to create a double-top or head-and-shoulders, it isn’t required.  The best way to protect ourselves is stick to our stop-losses.  While the market has bounced several times off of support, each further test is more likely to fail.  Double-bottoms are common, tripple-bottoms not so much.  1500 is the level we need to watch and failing to hold it will be a big red flag.  In the meantime swings of 5 and 10 points can be ignored because this is the market consolidating and building a base for a move higher.

INDIVIDUAL STOCKS

AAPL daily at 1:18 EST

AAPL is selling off, creating new 52-week lows.  There are rumors of an iWatch, iTV, dividends, buybacks, and stock splits, but that doesn’t save the stock from its core problem, too many hopeful holders.  Everyone loves AAPL and already owns as much as they can.  If it’s a buy at $550, it’s a steal at $450.   But this is why it is having such a hard time finding new buyers.  When you have a huge pool of holder and small pool of potential buyers, there is little place to go but down.

The problem with a large group of holders is they are just a few dollars away from becoming sellers.  Breaking support and creating new lows is challenging holders resolve and many are giving in.  There are many reasons to own this stock, but any holder needs to be willing to see the stock continue lower in the near-term.  For the swing-trader, continue pressing the short and look for $400 over the next few weeks.  I would be reluctant to keep a short past quarter end since the trade will likely take on a new personality after the mass exodus of fund managers tapers off.

Stay safe