PM: Rally on

PM Update

Markets shook off previous worries and have their sights set on all-time highs again.  AAPL could not hang with the market and continues struggling with the 50dma.

MARKET BEHAVIOR

Markets bounced back from Cyprus induced weakness and closed less than 10-points from the all-time closing record.  Volume was lighter than yesterday’s selloff and continues the trend of below average trade.

MARKET SENTIMENT

This market is persistent.  No matter what headline is thrown at it, it bounces back hardly missing a beat.  Of all the bad news this rally shrugged off, it was unlikely it would be taken down by banking problems in a tiny island most didn’t even know was part of the Euro Zone.  Today’s rebound confirms most traders either don’t care or assume it will be resolved without wider implications.  Right or wrong, we trade the market and this is what it thinks about Cyprus.

Resilience in the face of countless negative headlines shows just how committed holders have become.  They are stubbornly holding for more gains no matter what they say on CNBC or write in the WSJ.  Their holding is the source of the light volume, if holders are not selling, there is nothing to trade.

Today’s flat trade after the opening gap is also telling.  It shows shorts were not driven from this market in the typical relentlessly climbing short-squeeze.  Either shorts are confidently holding on, or they just aren’t there.  Given the lack of recent short-squeezes triggered by new highs and unexpectedly bullish employment news indicates most bears have either changed sides and joined the bull bandwagon or given up and gone home.   Either way this is a significant shift in sentiment and trader positioning.

Bouncing back from Cyprus is just one more reason for bulls to relax and enjoy the ride.  This market is gaining wide recognition as the rally that just won’t quit and no one needs to worry about anything because everything is under control.  And that is exactly what I am afraid of.

TRADING OPPORTUNITIES

Expected Outcome:
The rally remains intact.  I can’t tell you if we will see 5, 10, 25 or 50 points of upside from here, but I suspect it will be on the lower end of the range.  This market has become too easy for bulls and obvious for the casual observer.  It has also beat bears into submission to the point where they are not even trying anymore.  At this point it is hard to imagine people becoming even more bullish on this market and the last of the buyers are finally streaming in.

1565 and 1576 are the levels everyone is watching and I actually wonder if we will see a wave of selling hit the markets at those levels since there are so few left to buy the breakout.  It will be interesting to watch how the market responds to these levels, assuming we get there.

The high-probability trade remains sitting this one out and waiting for the next trade, likely shorting the completion of this head-and-shoulders pattern.  I wonder if sell in May comes early this year and if we fall to 1400, we could actually see a Summer rally this year.

Alternate Outcome:
This market could continue higher if the new-high headlines hit Main Street and triggers an influx of new investment from the general public.  While this will happen over time, it won’t occur at a rate high enough to affect the near-term trade.  The great rotation out of bonds and other secure investments into equities will take many years and will drive a secular bull market, but it will not be enough to avert the normal dips, pullbacks, and corrections every market experiences.

While I am out of the market waiting to get short, I will watch for strength carrying over into the second quarter.  I will consider going long again if it looks like there is more sustainable support and strength left in this market, but it will have to prove it to me first.

INDIVIDUAL STOCKS

AAPL didn’t share in the markets good day, but that’s nothing new since AAPL disconnected from the market months ago.  Without a doubt this stock will find a bottom.  Have we already passed that point, or are we standing on another trapdoor?  We can actually start thinking about Q1 earnings because that is the next major catalyst guaranteed to happen.  Dividend/buyback/product launch might or might not happen and we can’t plan on these events.  It seems Q1 and Q2 expectations have been ratcheted down a fair bit, but that is likely offset by the high level of optimism remaining in the stock.

For a trade, if the stock cannot reclaim the 50dma, there is little support for a continuation and expect lower prices.  If the stock breaks above the 50dma, it will be a major milestone and look for swing, momentum, and dip buyers to flood the stock trying to make a quick buck.  But these traders are not loyal to the company and will bail after a $20-$40 move.  We should do the same because there is a monumental supply of regretful owners that are praying to get out at break-even and this will slow any potential rebound.

Stay safe