AM: Where are the buyers

AM Update

Stocks are trading flat, just under record highs and AAPL is taking flight.

MARKET BEHAVIOR

Stocks sold off modestly in early trade, but found a bottom and recovered to break-even by late-morning.

MARKET SENTIMENT

At the open the market exhibited restraint from buyers and profit-taking by holders, but this was a brief episode as it quickly found a floor and dip-buyers prevented early weakness from cascading into something more.

Everyone is still waiting for higher prices and a climax surge to finish this rally off.  Until then they are buying dips, anticipating new-highs are a foregone conclusion.  Bears are becoming an endangered species and even they are afraid to short this market.  When everyone thinks the market will go one direction, it often heads the other.

If traders are expecting higher prices, they are already in the market waiting for those gains.  But if everyone is already in, who is left to buy?  The amazingly low volume earlier week shows a lack of both buying and selling;  holders are holding for higher prices and buyers are running low.  At least that is one possible, and bearish, interpretation of recent events.  For the bulls, they need to explain where new money is going to come from.  Some will claim the great rotation out of bonds, and while I agree, this is a multi-year process and not enough to prop up this market over coming weeks.     Money cleaving bonds will sustain a 10-year secular bull market, but it will not prevent intermediate corrections along the way.

TRADING OPPORTUNITIES

Expected Outcome:
The rally remains intact until proven otherwise.  That doesn’t mean we have to buy or own it at these levels, but it does mean we shouldn’t short this market simply because its gone too high and needs to pullback.  Wait for real signs of exhaustion or breaking down before betting on the reversal

Alternate Outcome:
There could easily be another 50-points left in this rally, but just because something can happen doesn’t mean it is likely to happen. If this rally is to continue, it needs to do it sustainably.  Today’s flat trade is a good start, but we still need to answer the question of where are the incremental buyers going to come from.

INDIVIDUAL STOCKS

AAPL is on fire today, likely because Samsung’s Galaxy S4 is largely similar to the S3 and didn’t leave the iPhone5 in the dust.  This is more relief than a fundamental reason to buy AAPL, but sometimes no bad news is good news.  But here’s the thing, if the S4 is mostly like the S3 and the iPhone5 is mostly like the iPhone4S, what does that say about the industry?

A lot of AAPL’s sales came from customers upgrading every two-years, but what happens when the difference between model years is not even large enough to justify paying the subsidized price?  I enjoy my iPhone5, but when neighbors ask if they should get the iPhone5 for $200 or the iPhone4S for free, the free one is clearly the better choice.  There is nothing special enough about the 5 to justify paying the premium.

The risk to both Apple and Samsung is their current products are so good that the upgrade cycle is going to stretch from 2-years to 4-years. Going forward customers’ existing phones will provide more competition to sales than the rivalry between Apple and Samsung.

Stay safe