AM: Buy the dip?

S&P500 daily at 1:23 EST

AM Update

Stocks plunge and retest lows of the recent consolidation.  They are attempting a mid-day rebound, but will this finally be the dip that doesn’t bounce?  AAPL is a few dollars from setting a new low and expect selling pressure to intensify if the stock falls under $419.

MARKET BEHAVIOR

Stocks crashed on weaker than expected employment.  It dropped to 1540 before finding a floor and is attempting a late-morning rebound.  Every other dip was a buying opportunity, is this another one?

The recent low at 1538 set on March 19th is acting as support, but watch for a dip under this level to trigger of a wave of automatic stop-loss selling.  The next obvious level of support is 1530, which coincides with the 50dma and Feb 19th’s top.  (old resistance becomes support)  After that it is free fall to 1500 and February’s low of 1485.  A bounce could happen at any of these levels, but expect additional selling pressure if it violates these technical levels.

MARKET SENTIMENT

The recent rally was largely based on finding the sweet spot between growing fast enough to improve earnings, but not too fast to threaten easy money from the Fed.  This morning’s weak employment numbers exposes a vulnerability in the economic leg of the stool the market is standing on.

The justification for buying the dip is this economic weakness means the Fed will not withdraw stimulus anytime soon.  But that is what the Fed has said all along and most traders already priced in.  Everyone’s been buying the market for weeks under the rallying call “don’t fight the Fed”.  How much more money do these bullish Fed traders have left to pump into the rally?

Early trade show people are buying the dip because they are far more excited about the prospect of easy money than fear the risks of a weakening economy.  That was the right trade over the last several years, but is there a limit to the Fed’s effectiveness?  The early bounce is expected, but is smart money buying the dip, or will they sell the bounce?  Declines frequently stair-step lower as traders try to pick a bottom and today’s support could be fools rushing in if buying the dip has become too obvious of a trade.

Markets move exclusively on supply and demand.  Fundamentals, technicals, and headlines are only secondary in nature because they do not move prices directly.  They only affect markets if they change traders’ outlook of the future and cause them to readjust their portfolio.  If a news story simply reinforces existing views, the market won’t respond because everyone maintains their current positioning.  If the bulls expected QEfinity to stick around indefinitely, a weak employment report will not help boost their case because that view is already priced in.  The one thing not priced in was a weakening employment, a lethargic economy, and a threat to corporate earnings.  That is why a bounce on expectations of more easy money is unlikely to last.  Ignore what is already priced in and trade what is not expected.

TRADING OPPORTUNITIES

Expected Outcome:
The value of selling into strength is evident this morning.  Anyone who sold over the last few weeks is eagerly looking for the next trade while the guy who held for the top is stressing between selling or holding.  In theory holding for the top and using a trailing stop sounds better, but it is much harder to execute in practice because it is difficult to contain our emotions on days like today.

Markets often go too far on both the upside and downside.  Obviously November’s low was overdone.  The question is if  March’s highs went too high.  Markets operate on supply and demand.  Thawing fear and pessimism from early in the year provided the lift to record highs, but now the market is fairly optimistic, how many buyers are left to keep the good times rolling?  If every other dip was a buying opportunity, how many dip-buyers are still sitting on cash ready to save the rally?

Every rally comes to an end and this one is no different.  While I cannot say for sure if this rally is done, I know the odds are stacked against it and buying the dip here is riskier than at any other point in the rally.  No one has a crystal ball and success in the markets comes from trading probabilities.  Given the size and length of the recent run, there is more downside than upside here.  Like everything in the market, declines are hard to trade.  A ‘straight’ down move often involves multiple bounces and false bottoms along the way.  Patience is key, trade from strength, and don’t react impulsively to the market’s head fakes

Alternate Outcome:
When in doubt, stick with the trend.    These things go so much further and longer than anyone expects.  All-time highs and recent weakness awakened bears from hibernation.  Markets fall when everyone thinks the dips are buyable, but there could be enough cynicism left to fuel one more push higher.

AAPL daily at 1:23 EDT

INDIVIDUAL STOCKS

AAPL is just a few dollars from setting a new low.  Expect a wave of technical selling to hit the stock if it drops under $419.  No matter how great bulls think this company is, no one else is interested in buying to the stock and it keeps sliding.  Bulls might eventually be right, but the stock will likely see lower prices before this is done.  $400 is easily within reach and a pullback to $350 would be a 50% retracement from the highs, something often seen in leading stocks that fall from grace.

NFLX, AMZN, and LNKD are down with the rest of the market.  High beta stocks are a poor place to hide out in through a market correction.  If a trader expects further weakness, sell these stocks and look to buy them back cheaper once the broad market weakness passes.

Stay safe