AM: Cyprus who?

AM Update

Stocks recover from Cyprus fears, but is the coast clear?  AAPL is struggling with the 50dma and is building a trade one way or the other.

MARKET BEHAVIOR

Stocks bounced back from Cyprus weakness and are solidly above 1550 this morning.

MARKET SENTIMENT

Europe is a three-year old story and if it hasn’t crashed the global economy yet, it probably won’t.  Our historic 2008 financial implosion occurred over a period of months and if Europe has limped this far, they will likely pull out of it.  This Cyprus stuff is largely noise.  We survived Greece which is 10x the size, so Cyprus is simply a bump in the road.  The biggest concern isn’t the size of the bailout, but the precedent a savings account tax sets.  There is a bit of hubris at the ECB and the biggest problem is the way they presented this bailout.  Instead of calling it a tax, the should have approached Cyprus depositors and said “Your bank is about to go bankrupt and you will lose everything.  The ECB will step in and bailout out your bank if you are willing to pay 10% fee.  If you chose not to pay the fee, you will likely lose everything.”  Phrased that way it is hard to argue with them and most would be grateful the ECB ‘saved’ them instead of the outrage we are currently seeing.  Presentation and perception is everything.

The rebound from Cyprus selling shows the market is less worried about a domino effect and fear based selling has largely dried up.  We can now add Cyprus to the long list of bad news the market shrugged off.  This teflon rally is immune to headlines and it is unlikely one will take down this market.  Instead we need to watch for a diminishing supply of available buyers.

Markets top for one of two reasons, a wave of selling or an absence of buying.  Holders have repeatedly  proven how comfortable they are at holding through weakness and this prevented negative headlines from crashing the market.  Today’s rebound further reinforces this stubborn holding behavior.  The next question becomes how much buying is left because that is what will finally kill this rally.

Shorts are largely absent as demonstrated by the lack of meaningful short-squeezes on good news, new highs, and reversals.  If shorts are absent and bears less vocal, this is a major shift in sentiment and likely shows many cynics have joined the rally bandwagon.  As a contrarian there is nothing as unnerving watching the critics disappear.

TRADING OPPORTUNITIES

Expected Outcome:
The market is within 10-points of all-time closing highs and it seems likely the relief rally will push us through this level.  But rather than be a bullish breakout, this minor double-top could very well be the end of the rally.  Everyone knows rallies cannot last forever, meaning one of these upcoming dips is not going to bounce.  The impending rollover to the second quarter will give institutional investors a clean slate and often they approach the next quarter with a different strategy than the one that just closed.

The conservative trade remains sitting out this volatility.  At this point there is limited upside and a lot of downside, so the only real trade is waiting for a good short entry.

Alternate Outcome:
This might simply be another dip on the way higher.  Holding for more gains is getting a tad greedy, but further upside is something we still need to watch for.  Continued strength into the 2nd quarter invalidates a large portion of my bearish thesis and will be a signal to reevaluate the current market for more upside.  The current trading range is somewhere between 1550 and 1576.  If we hold this level for a while, time instead of pulling back will refresh the market and set the groundwork for a continuation.

INDIVIDUAL STOCKS

AAPL is not sharing in the markets good day.  The 50dma is providing significant resistance and it is not surprising since the stock was $650 the last time it traded above the 50.  But this can cut either way.  Rebuffed at the 50 likely means we will see new lows in the near-future.  Break the 50 and it will trigger a large wave of short covering and momentum buying.  Remember, even if the stock breaks out, this is just a trade and lock-in profits in the upper $400s because $500 will provide a significant level of overhead resistance as underwater traders try to get their money back.

Stay safe