PM: Good times keep rolling

PM Update

Stocks set a new high yet again, and AAPL had an interesting day.

MARKET BEHAVIOR

Markets rose for the seventh-consecutive day on the lightest volume in a month.

MARKET SENTIMENT

Sometimes low-volume is bullish and others it’s bearish.  Like everything in the market, there are two equally valid and opposite explanations for every observance.  Early in the rally low-volume signaled reluctance and cynicism and  these holdouts provided the fuel to push the market higher.  But now that we’ve risen this far, low-volume signals the market is struggling to find new buyers and we are approaching exhaustion.

Of course this is like reading tea-leaves and if the answer was obvious everyone would know what to do.  The best we can do is use clues to identify the high-probability trade.  We’ve risen seven-consecutive days and nine of the last ten as the market  surged 70-points in two-weeks.  The market made new highs on declining volume.  We had the perfect setup for a short-squeeze between Friday’s employment surprise and today’s new highs, yet few shorts ran for cover, showing shorts are finally shying away from this market.  And lastly we are in the final weeks of a very bullish quarter.  It seem the only thing keeping this rally going is reluctance of holders to sell (greed) and that can only carry us so far.

TRADING OPPORTUNITIES

Expected Outcome:
While momentum is clearly higher, the rally is on thin ice.  At the very least it needs to consolidate recent gains near 1550 before making a sustainable assault higher.  If the market keeps reaching for all-time highs over the next couple days, look for an imminent pullback due to exhaustion.

This is a good time to take profits and reevaluate.  Even long-term investors should consider locking in a portion of their gains and wait to buy those stocks back cheaper in a month or two.  The market ran 210-points since the November lows and it is extremely optimistic to expect the rate of gains to continue indefinitely into the future.

Selling winners into strength is one of the hardest things to do, but it is what separates the successful from the wannabes.  If the average retail investor waits to sell pullbacks and successful investors claim the secret to their success is selling early, you have to decide who you want to model your trading style after.

Alternate Outcome:
Individual markets are entirely unique and one similar example would implode here while another rallies 50-points.  No one knows what will happen and the best we can do is trade probabilities.  If the high-probability trade is a near-term top, then the alternate outcome is a continuation.

The market is clearly drawn to 1565 and we could easily hit that on Tuesday.  The all-time high is just a few ponts beyond that and wouldn’t be a stretch to get there. Hitting these major milestones could trigger a new short-squeeze, propelling the market even higher.  From there it could consolidate those gains before continuing even higher.  There are plenty of examples in the last 100-years where the market strung together six-month rallies and there is nothing to say it cannot happen here.

But the best trade is sticking with probabilities and locking in profits.  No doubt the market’s momentum will carry it higher, but it is impossible to pick a top, so we shouldn’t try.  If the market exhibits sustainable strength over the next week (consolidation), we get back in.  Until then, lets catch our breath and look for the next high-probability trade.

INDIVIDUAL STOCKS

AAPL had an interesting day.  The stock popped $10 intraday over just a couple of minutes on no news.  The rumor is some major player took a huge stake and that got everyone excited.  If it really was a major money manager, they should fire their broker for negligently running the stock up like this.  Most pros ease into their positions so they don’t bid against themselves like this and is why I doubt the validity of the rumor.  And even if a major investor plowed a ton of money into the stock, that doesn’t mean he/she has any better idea of where the stock is going than we do.  (assuming this is not illegal insider trading)

The bigger question is if this pop signals the bottom is finally in.  I’ve been fairly critical of AAPL since it collapsed after earnings.  Over the last month-and-a-half any strength has been a selling opportunity.  Has the stock finally run off all the bulls and reached a capitulation point?  I still say no.  Don’t get me wrong, I’m not an AAPL hater and they make fantastic products.  I’m even rooting for the stock because it is such an important part of investor confidence and a major component of the indexes.  But at the same time I have to be a realist.  To break the down-trend the stock needs to make a higher-high.  There is a minor high at $455 and a major high at $485.  Closing at $437 does nothing to break the trend lower and buying this bounce is simply bottom-fishing.

Going forward it seems likely the stock will trade $400 before $485, especially if we see broad market weakness  in the near-term.

Stay safe