PM: Sell the breakout?

PM Update

New highs, but everyone is still waiting for the pullback.  AAPL finally bounced after selling off for 12 of the last 15-days

MARKET BEHAVIOR

Stocks launched ahead 1% and finished at fresh 52-week highs.  The interesting thing is stocks traded mostly flat after 11am , neither selling off nor adding to early gains.  Volume was higher than yesterday, but still only average.

MARKET SENTIMENT

I don’t follow the Dow because it is a poorly constructed index, but the media and non-investing public does, making it noteworthy from a broad sentiment standpoint.  The Dow set an all-time high today, eclipsing the old record from 2007 and is the first major index to achieve this momentous milestone.  The Financial Meltdown is officially history and this is a significant step in healing the emotional wounds scarring an entire generation of investors.  But this is a multi-year story and it will play out over the next decade as these shell-shocked investors start wading back into equities.

A lot of traders remain reluctant to buy the new highs and are waiting for the inevitable pullback.  It didn’t happen today, but maybe tomorrow, or so the logic goes.  The truth is we will continue higher until people stop waiting for the pullback.  Right now stock holders are feeling good about themselves.  Anyone with a broadly diversified portfolio is sitting on profits and are eagerly awaiting additional gains.  Traders out of the market are feeling the pinch as they wait in vain for the breakdown that still hasn’t happened .  Obviously no one want to chase a breakout to new highs, but how much longer can they watch the market go without them?

While the last three-days of gains were decisive, they came on low-volume.  This rally isn’t a story of frenzied buying, but scarce supply as holders are not interested in selling.  Sometimes low-volume is a warning sign, others it signals a continuation.  After repeated low-volume rebounds to new highs, I don’t need to tell you which one applies here.  Right now the savvy trader is embracing the low-volume rally and fearing the high-volume surge.  When the crowd finally rushes to buy, we will take our cue to exit.

TRADING OPPORTUNITIES

Expected Outcome:
The market can do two things here, surge higher or pullback and consolidate gains.  The surge will be the last gasps of this rally before it collapses in exhaustion.  A dip tomorrow and sideways trade through the remainder of the week signals a more sustainable continuation.  We will see more chasing going into quarter end, meaning there are still a few weeks left in this rally, but we could see a couple of days of weakness first.

Alternate Outcome:
We came a long way and a lot of people are long this market.  Last week’s pullback likely put in the left shoulder of a head-and-shoulder pattern, meaning we are getting close to the top of this move.  While I don’t think today set the top of the head, we still need to honor out trailing stops to keep us from riding a winner back into the dirt. Selling  last week took some downside volatility out of the market and while a dip to 1525 is reasonable, falling under 1515 is more worrisome and a good place to set a trailing stop.

INDIVIDUAL STOCKS

AAPL bounced nicely and recovered a couple percent of the recent selloff.  While the bounce is interesting, buying it is still catching a falling knife.  12 of the last 15-days were negative and the stock shed over 10% in three-weeks.  The stock continues making lower-lows and lower-highs and is not a worthy buy candidate until it breaks this trend and finally makes a higher-high.  There is a minor high at $455 and a more meaningful high at $485.

Today’s bounce could continue higher on broad market strength, but the trend remains lower.  The market often moves in a direction that will humiliate the greatest number of traders.  It seems today’s bounce brought relief, meaning the pain trade remains lower.  The selloff will likely continue until AAPL is the most hated stock and everyone is embarased to admit they still own it.  We are not there yet.  It is a great company, the problem is no one is interested in buying the stock.

Stay safe