AM: Tug-of-war

S&P500 daily at 1:18 EDT

AM Update

Markets are higher as the back and forth continues.  AAPL is challenging the 50dma and is presenting a trading opportunity.

MARKET BEHAVIOR

Stocks are higher as the tug-of-war continues.

MARKET SENTIMENT

The battle between bears and bulls is heating up.  We saw a similar back-and-forth in early February.  That time the bulls prevailed, can the pull off another victory here too?

Complacency is the norm as every dip is just another buying opportunity.  All the fear from early in the year is long forgotten.  If the market will continue higher, who will be next buyer?  That is a tough question.  Shorts are avoiding this market, making it unlikely a short-squeeze will propel us higher.  If shorts are away, it probably also signals many former cynics have changed sides and joined the bandwagon.  There is money flowing out of bonds and into equities, but this is just a trickle and not enough to affect short-term volatility.  With the quarter end just days away, most money managers have already adjusted their portfolios and are ready to start fresh in April.

The news is obsessing over Cyprus, but it is an isolated event unless you live on the island or are a crooked Russian hiding your money there.  Other than those two groups, there is little exposure for the rest of the world and the risk of contagion is nil.  The worst is it could highlight weakness in the European banking system, but someone had to be living under a rock the last three-years if this is news to them.  The market is trading near pre-Cyprus levels, meaning little risk premium has been priced in, thus there will be little bounce when the crisis is resolved.

Right now we still don’t know who will buy the market going into the second quarter and that is why I remain wary of the market.  Without a doubt momentum could carry us another 10 or 20-points higher, but the next 50-point move is lower, not higher.

TRADING OPPORTUNITIES

Expected Outcome:
When everyone is buying the dip, we should sell the strength.  Contrarian investing works because when everyone is bullish and owns stock, there is no one left to buy and keep pushing prices higher.  It has nothing to do with fundamentals and everything to do with supply and demand.  Without demand, prices cannot continue higher no matter how good the news.

I am really tempted to short today’s strength.  Three is often the magic number in the markets.  The first peak usually bounces back because everyone is still excited by the rally.  The second peak also bounces, but less enthusiastically.  By the time we get around to the third dip, most of the buyers bought the first two dips and there is little left to prop up this dip.  Over a very short time-frame, we have that with last Thursday’s peak, this Wednesday’s rebound, and now today’s strength.  If we cannot hold these levels, there are few buyers left to buy the dip and the slide will start shaking free previously confident holders.

Alternate Outcome:
We continued past February’s volatility and there is no reason we can’t do it again.  But just because something is possible doesn’t make it a good trade.  Success in this game comes from understanding probabilities.   Of course we could continue higher, but given how far we’ve come and all the other warning signs, we should be more fearful of this market than enthusiastic.  Most of my bearish thesis rests on weakness after the first quarter chase ends.  If the market holds up and builds constructive support in April, that signals the rally is still on.  These things always come to an end at some point, but they often surprise us by lasting longer than we ever imagined.  I expect near-term weakness, but am open-minded to a continuation.

AAPL daily at 1:18 EDT

INDIVIDUAL STOCKS

AAPL is up to the 50dma.  Reclaiming this moving average is significant because it hasn’t been above it since early October.  The biggest question is if people are buying in anticipation of this event and that leave few buyers to buy the actual breakout.  We often see this with expected news events and is where the axiom “Buy the rumor, sell the news” comes from.

AAPL remains one of the most followed and loved stocks in the market.  This technical milestone will be shouted from the hilltops everyone will know about it.   It will be interesting to see how traders respond.  Anyone out of the stock could use this signal to buy the dip.  But how far will this dip-buying carry the stock without a fundamental catalyst to bring in a wider pool of buyers?

The easy trade here is buying the break above the 50dma and using a stop $5 under the MA.  If the stock doesn’t explode to the upside, then most of the buying happened ahead of time and there will be little new demand, making this a sell-the-news trade.  If the stock cannot hold the 50dma and crashes back through, it will likely continue sliding to new lows.  If a trader’s thesis is to profit on the strength from a 50dma breakout, if that surge doesn’t happen, they need to sell ASAP because their original analysis is flawed and invalid.  Long-term success in the markets is all about defense, not offense.

Stay safe