AM: Waiting for employment

S&P500 daily at 1:05 EST

AM Update

Stocks are consolidating gains ahead of Friday’s employment numbers.

MARKET BEHAVIOR

Stocks are modestly higher, but hitting their head on 1545.  After last week’s volatility, the calm trade is welcome.

MARKET SENTIMENT

Holders continue holding and cynics keep resisting.  The calm trade shows stock owners are comfortable at these levels and awaiting further gains.  This market is rising on tight supply, putting a wrench in the pull-back crowd’s plans.

This is just another example of the least expected trade being the right trade.  Between December 31st and January 2nd, the market surged 65-points in just two trading days.  To any casual observer this was too-far, too-fast and everyone waited for the inevitable pullback.  That was over two-months ago and the market is up another 80-points.  The pullback crowd is technically right because every market eventually corrects, but in trading early is the same thing as wrong.  This week we have renewed cynicism claiming the all-time highs in the Dow are unjustified and signal an imminent top.  But here we are, holding those gains.

Unsustainable gains typically reverse within a couple of days because the market runs out of buyers and without demand, prices slide.  Holding these levels for a 3rd day shows there is adequate buying to support new highs.  Every jump in price invites the paranoid to lock in profits, but this is a temporary weight on the market and after a couple of days most of the that selling is done.  The end of profit-taking further tightens supply and sets the foundation for the next move higher.

Traders are waiting for Friday’s employment report.  Bulls are expecting good things and bears are waiting for reality to kick in.  Both sides have already positioned themselves and there is little adjustment by either side today, leaving trade quiet as we wait for the next economic catalyst.

Speaking of economic catalyst, are we still under sequester?  What ever happened to that anyway?  Turns out the sequester was widely expected, priced in, and nothing but media driven hype.  If the baristas at Starbucks are talking about it, you know you can safely ignore it.  The only way to get ahead in this game is by trading things people don’t know about yet.  No matter how good or bad, if everyone is already talking about it, they already factored it into their portfolio.  News only moves markets if it makes people adjust their portfolio.  If everyone expected it, they traded ahead of time and the actual news is uneventful.

TRADING OPPORTUNITIES

Expected Outcome:
It will be interesting to see how the market responds to employment tomorrow.  It will either go up, down, or sideways.  There is an above average chance for another short-squeeze to push this market above 1550, forcing under-invested money managers to chase into quarter’s end.  A poor employment report is the only thing left in the bear bag of tricks and if it fails to deliver, look for a wave of buying to hit the market.  We could see weakness if the number is bad, but it likely won’t get carried away since we flushed out most of the weak hands in last week’s pullback to the 50dma.  This market wants to go higher and likely will simply wave away a weak employment report as another excuse the continue easy money.  The last outcome is an expected report and sideways trade.  This simply supports status quo, which is a gentile climb higher.

This market is getting closer to the top with each passing day and new high.  We are not there yet, but we should be more focused on taking profits than putting on new positions.  If someone is not already in the market, don’t chase and wait for the next trade.

Alternate Outcome:
This market is ignoring a lot of negative headlines, but sometimes reality catches up at the most inopportune times.  While holders are confident and keeping supply tight, there is nothing that shakes confidence like falling prices.  Even the most resolute bull will quickly fill with doubt when the market is plunging.  The market should find support around 1525 in the event of near-term weakness, if it doesn’t t we need to prepare for lower prices.  A dip under 1500 means the pullback is underway, but we will likely see a bounce, forming the right shoulder of a head-and-shoulder.  Use that bounce to put on a short.

INDIVIDUAL STOCKS

AAPL traded lower before jumping above break-even midmorning.  Volatility remains high as bulls and bears are fighting it out over where the stock will go next.  Bottom-pickers were excited about Tuesday’s powerful rally, but so far it hasn’t triggered much follow-on buying from a larger pool of investors.

NFLX is challenging support at $175 and a dip under this key support level will trigger a wave of stop-loss and bear shorting that pushes it back to $160.  But this is just a step back in the climb higher.

Stay safe