AM: Finding support

AM Update
Stocks are finding support at 1550 after Friday’s employment, but should we be selling the strength?

MARKET BEHAVIOR
Stocks opened modestly lower, but found support near 1550.  The market is calm as we head into the next major catalyst, earnings season.

MARKET SENTIMENT
Sometimes new information is easily quantifiable, like an employment report, Supreme Court ruling, or a Fed action.  Other times it is a little murky but still manageable, like a new piece of legislation or a single company’s earnings release.  These contain dozens, if not hundreds of pieces for investors to consider   Then there is earnings season with its tens of thousands of new data points.  Is one company’s bullish outlook more important than another’s bearish one?  There is so much variability it will make a fundamental or news based trader’s head explode.  And in fact no one can make sense of it, they simply pick and choose pieces to promote their bias or explain why the market made the move it did.

This is especially important to remember at times like this, news and fundamentals don’t move markets, only traders actually buying and selling stocks do that.  Sometimes traders change their portfolio allocations based on a new piece of information, other times they don’t.  That is why the market’s reaction to news can be so confusing and often contrary to common sense.

The market only moves on news if it changes people’s opinion they act on this new insight.  A bullish piece of news could change a bear’s mind and lead him to buy stocks.  But a bullish piece of news won’t change a bull’s mind and when he is fully invested he simply cannot buy more.  This is why a saturated bull market fails to respond to bullish news.

Over the last few months the market has become increasingly bullish. If most traders expect good things and are already long this market, no matter how great the news, there are few new people left to buy the market and keep the rally going.   On the flip side, if a large number of people are bullish and long stocks, it is disaster waiting to happen if all these bulls turn into sellers if news disappoints.

TRADING OPPORTUNITIES

Expected Outcome:
Once we recognize the setup, it becomes easy to build a trade from it.  Limited upside on great news and huge downside on bad news shows the risk/reward and probabilities are stacked against this market. Without a doubt the Energizer rally could keep going, but there is little advantage to holding here.

Long-term success is about the process, not the individual result.  Each move in the market is largely random and can easily go either way.  But over time the advantages of trading probabilities add up.  This isn’t about how we do on this particular trade, but how we fare over the next 100 trades.

And just to be clear, I am not a doom-and-gloom bear, just a realist that remembers the markets go up and down.  The first quarter was all up, so it makes sense that we are close to the next down.

Alternate Outcome:
The only thing bulls have going for them is momentum, and often that is more than enough.  These moves go far longer than anyone expects.  The deteriorating picture in other parts of the world is driving foreign investment into US dollar dominated investments.  This influx of foreign investment and thawing fear of equities could be the new sources of buyers.  The question is if this surge of buying is enough to overcome the natural ebb and flow of prices.  Markets go up and markets go down, it would take something fairly exceptional to let the rally continue another few months.

INDIVIDUAL STOCKS
AAPL is struggling to find buyers just above the 52-week low.  The biggest value story of a generation keeps getting cheaper.  Fundamentals simply don’t matter and the stock is a victim of too much bullishness.  When everyone loves a stock and already owns it, it is difficult to find new buyers.  After that point there is nowhere to go but lower.  Given the stock’s inability to recruit new buyers after breaking above the 50dma two-weeks ago, it sure feels like the selling isn’t done yet.

Recent big winners NFLX, LNKD, AMZN, and GOOG are struggling as money is shifting from speculative plays to more conservative names.  The greatest advantage we have as small investors is the ease we can move in and out of the market.  There is no reason we need to sit through market weakness.  After a strong move higher, we take our profits and wait for the inevitable pullback where we buy back in at cheaper prices.  No doubt a couple of high-flyers will keep going in spite of broad market weakness, but we are looking for high-probability trades, not trying to figure out what 10 or 20% of stocks will hold up.  We’re in this to make money and we can only do that by selling winners.

Stay safe