PM: Is this it?

PM Update

MARKET BEHAVIOR
Stocks suffered their biggest decline in five and a half months on the highest volume since March’s quadruple witching.  The market lost 36-points as it sliced through support at 1570 and didn’t stop falling until 1552.  The next level to watch is 1540 where the market bounced two-previous times and is also backstopped by the 50dma.  Breaking 1540 will trigger wider selling and the next level of support is down at 1500.

MARKET SENTIMENT
The riskiest markets are where people feel the safest.  Five-months into this rally the largest up-week of the year is immediately followed by the biggest loss in nearly half a year.  Increased volatility is often seen in topping markets and if this doesn’t qualify, then I don’t know what does.

Today’s givebacks drop us to levels first seen in early March.  Anyone who bought in the last month is at best break-even and fearing more losses.  The supreme confidence of the resolute bull is giving way to uncertainty and indecision.  Every other dips been a buying opportunity, the question is if this 2.3% plunge is like every other selloff this year.  The problem bulls ran into is recent gains were made on light volume.  They had the strength to push prices higher when confident holders were keeping supply off the market, but the first day of above average supply overwhelmed the few bulls with cash left to buy the dip.

Recent weakness bounced back quickly as the dips grew more mild.  This is because more and more traders grew comfortable buying dips and rushed in earlier and earlier on each subsequent dip.  But today’s decline couldn’t find a bid and kept sliding lower and lower.  Early today the market found support at 1580.  Then it was 1570.  And finally 1560 prior to the attacks in Boston.  Traders tried to buy the dips at each of these key levels, but with so few buyers left they cannot keep up with the wave of supply hitting the markets.  We can only bounce so many times before running out of dip buyers and this market appears over its limit.

While the events in Boston were tragic, the market was already near the lows of the day and it only had a modest impact on prices.  It is unfortunate we live in a world where these things happen, but from a trading perspective, most will view this as an isolated, one-off event and is unlikely to change their outlook on stocks and the economy.

TRADING OPPORTUNITIES
Expected Outcome:
Either this is the long-expected pullback, or just another bounce on the way higher.  Given how old this rally is and how close we are to the highs, there is still plenty of room for additional selling.  At this point there is little reason to be in the market.  A rebound will be slower, methodical, and have limited upside.  A selloff will plunge lower in the blink of an eye.  The risk/reward is heavily skewed against owning stocks here.  That doesn’t meant we won’t see another rebound, it means this is a poor trade to make.  Long-term success in the markets is less about individual results and more about the process.  Remember it is better to be out of the market wishing we were in, than in the market wishing we were out.

The selling will likely continue on Tuesday, but look for support at 1540.  This could be an hour-long pause before plunging lower, or a multiple day bounce before resuming the selloff.

Alternate Outcome:
1540 is the key level to watch.  Bouncing back from this level, or better yet a slight dip underneath it, will show buyers are still behind this rally.  Monday’s selloff shook many weak holders from the market and once that selling pressure dries up the rally will resume.  Bouncing and holding 1560 will show this rally is back.  But if this market cannot hold 1540, stay out of the way and don’t try to catch the falling knife.

INDIVIDUAL STOCKS
Hard not to talk about the huge crash in GLD.  The safety trade isn’t providing much protection, down 13% over two-days.  Commodities are supposed to be relatively stable and is why many traders leverage up their position 3 to 5 times.  This massive crash is largely driven by margin calls as brokers are forcing their over-leveraged customers to sell.  This forced selling is triggering other margin calls and the vicious cycle often repeats until several major funds are forced to liquidate.

In the highly leveraged commodity markets, selling feeds on itself far more aggressively than what equity traders are used to.  This was fine when commodity trading was limited to experienced professionals, but the advent of the GLD allowed the masses to speculate in gold commodities.  As they are learning, this isn’t as easy as it first seemed.

The most frustrating thing for many traders is they were led to believe Gold was a safe hedge against market volatility and money printing.  Today is just another example of the “safest” position in our portfolio being the riskiest.  In many ways Gold mirrors what happened in AAPL.  Both were hugely popular trades that couldn’t lose, but in the process became over-owned.  Once everyone who wants AAPL or Gold had as much as they could hold, there was no one left to buy.  No matter what the fundamentals dictate, prices decline when demand dries up.  There is still a strong case for AAPL and Gold, but it doesn’t matter when no one is buying.  The plunge in Gold is a structural and limited to itself.  This is not indicative of the wider economy and is simply an isolated supply/demand event within a particular security.  There are many reasons to be suspicious of this market, but margin calls in Gold is not one of them.

Plan your trade; trade your plan