PM: Where’s the volume?

S&P500 daily at end of day

PM Update

Stocks bounced back from early weakness, but volume was noticeably absent.  What does this say about the market and where it is headed?  AAPL’s strength is impressive, but is it sustainable?

MARKET BEHAVIOR

Stocks sank at the open, the biggest drop since February 25th’s massive reversal.  As volatile as the day was, volume ended surprisingly light, 12% under average.  In spite of all the headline drama, not many people were adjusting their portfolios on the heels of Cyprus news or the market’s weakness.

MARKET BEHAVIOR

Cyprus gave the financial shows a lot to talk about, but the intraday strength and low-volume shows not many traders are worried about it.  There was an initial surge of selling, but that worked through the system in a matter of minutes, allowing the market to rally near break-even by midday.  Stocks could not hold the rebound and closed in the middle of the day’s range, but not a bad day given how much hype there was over the Cyprus deposit tax.

What does this price action tell us?  Holders are still willing to hold through both negative headlines and weakness.  At times this is a virtue and others it will get us into trouble.  Over the last few months holding volatility has been rewarded as each dip bounced back to new highs.  The difference is many of those dips were on elevated volume as traders bailed en masse, fearing it was the start of another market collapse.  This time volume is below average showing traders are no longer afraid of dips.

The market is weak and traders are indifferent, does this present a contrarian trading opportunity?  By itself that doesn’t mean much, but taken with all the other signals we received lately, it sure feels like this market is living on borrowed time.  New highs and unexpected employment strength is no longer triggering short squeezes, showing shorts are finally giving up.  The rally is four-months old and covered a respectable 16%.  We are coming up on a new quarter and potential shift in market personality.  Plus a few others we’ve covered in recent posts.  Is it different this time?  It sure feels like it.

TRADING OPPORTUNITIES

Expected Outcome:
I’ve been extremely bullish on this market from the lows in November, but there comes a time in every rally when we need to get off.  We are in this to make money and can only do that by selling our winners.  This is not trying to pick a top, but saying its been a good ride and it is time to look for the next trade.  The market could very well continue a few percent higher, but the risk/reward has changed and staying in this market no longer puts the odds in our favor.  We will continue watching the market for consolidation, signaling this market has refreshed itself and will gladly buy back in if the conditions warrant.

The aggressive trader needs to be looking for a valid short entry.  Stocks can only bounce so many times before their luck runs out and this market is pushing it.  Holders willingness to hold means when the market finally starts sliding on seemingly benign news, we have finally run out of buyers and no matter how resolute holders are, without demand prices will continue declining.

Alternate Outcome:
Each dip refreshes the market because it flushes out weak holders and creates a new pool of potential buyers.  February’s dip to the 50dma was highly productive and could be a mid-rally dip on our way to much higher highs.  But rather than blindly holding on here, we need the market to prove itself.  Recovering 1560 and holding it for a couple more days supports a continuation to all-time highs.  How much more upside is left will be determined by watching how the market’s response to the new highs.  Obviously selling off is not helpful to the continuation, but so is surging higher on large volume.  Both these scenarios show we are running out of buyers.  The most sustainable trade will be sideways consolidation while holding support.

Again the risk/reward is not in our favor here, but we need to keep an open mind that February’s dip was just the midpoint in a larger rally.  Continued strength into next quarter will be a strong indication that this rally has legs.

INDIVIDUAL STOCKS

AAPL daily at end of day

AAPL came back to life on speculation of a dividend increase.  We heard this before, but much like a broken clock, if we wait long enough, eventually it will be right.  Tomorrow is the one-year anniversary of AAPL’s dividend and bulls are hoping it would be an ideal time to announce an increase.  Maybe it will finally happen, or maybe it is just another rumor put out by stock manipulators and embraced by desperate holders.

Does increasing the dividend address the reasons the stock is 35% off the highs?  Steve Jobs was notorious for his disdain for shareholders and the stock rallied strongly in spite of his lousy capital allocation strategy.  The real reason the stock peaked in September because it ran out of buyers.  Everyone who wanted AAPL already had as much as they could hold and there was no one left to buy.  Only after the stock started selling off did people mentioned concern over iPhone5 sales and increased competition.  These were just excuses used to justify the selloff, not the other way around.

To reverse the slide, AAPL needs to fix what lead to the selloff.  It needs is to find buyers.  As long as everyone continues defending AAPL, it means everyone still believes in the story and these people already own all AAPL they can hold.  The question any AAPL bull needs to answer is who is the next buyer?

The stock has a date with the 50dma in coming days and breaking through this technical level could lead to a wave of momentum buying, but these are traders not investors.  Expect these buyers to jump out for a quick buck when the stock comes against resistance between $485 and $500.  At best this stock ended the selloff and is entering a trading range, meaning the best trade is buying the dips and selling the rallies, but I still don’t buy it.  AAPL bulls outnumber bears by a large margin and this skewed sentiment means lower-lows are still likely.

Stay safe