AM: Is this time different?

AM Update
Stocks are challenging 1600.  Is that the next major milestone on our way higher?

MARKET BEHAVIOR
Stocks continued the rally, running up to 1597 before easing off the highs by mid-day.

MARKET SENTIMENT
Stocks covered nearly 60-points since Friday’s opening low.  This is the fourth surge of ~60-points over a few days since the market bottom in November.  The first was the rebound off the November lows.  The second was the Fiscal Cliff pop over New Years.  The third followed February’s dip to the 50-dma.  And we are in the middle of the fourth.

The common trait is they came on the heels of an aggressive selloff and widespread fear.  The November lows dipped 100-points over a month.  The selloff into the end of the year slid 50-points before bouncing on December 31st.  February slumped 45-points before bouncing.  Last week only pulled back 33-points from the highs before surging 60.

Prior selling is what fuels the next rally.  The selling leading up to this pop is the lowest we’ve seen and makes me question how much fuel is in the tank.  The strongest surges occur early in a recovery when the market is most oversold.  Almost five-months into this rally we are many things, but oversold is not one of them.  Coming this far on the heels of modest selling makes me wonder if there is enough buying left to power another sustainable leg higher?  I don’t see it and I remain reluctant to chase this market here.

Clearly I was early in jumping off the rally bandwagon, but it is impossible to know just how far the crowd will push these things.  And they might not even be done, at this rate we would blast through 1650 next week.  I’d love to catch those gains, but I don’t feel comfortable with this market and I will continue to sit out until it starts behaving in a way I understand.  I’m okay missing additional upside because chasing something I don’t understand is nothing more than gambling.

TRADING OPPORTUNITIES

Expected Outcome:
Stocks keep marching higher, but everything indicates the market is skating on thin ice.  This is great for those willing to take a chance, but it only ends well if they know when to lock in profits.  Eventually one of these dips will not bounce and many traders will give up all their gains waiting in vain for that bounce.

Alternate Outcome:
Am I falling into the trap of tunnel vision by allowing my skepticism of this rally to skew my analysis?  Undeniably I’ve been wrong, but the question is if my analysis is fundamentally flawed, or simply early.  Obviously there is demand at these levels because buying is the only thing that can push prices higher.  One possible mistake is I am looking for an intermediate top, which occur more quickly.  Major tops take longer to develop and run up higher before finally breaking down.  I certainly hope this is not the case because I am a medium-term bull, but the longer it takes for this market to top, the bigger risk there is to the downside.  It was a long time ago, but things were quite pleasant in the Fall of 2007 prior to one of the biggest bear markets in history.  I don’t believe we are in a similar situation, but the higher this market goes without correcting, the more it scares me.

INDIVIDUAL STOCKS
AAPL is trading sideways this morning and modestly in the red.  It is unlikely we will get new fundamental information prior to earnings, but rumors could moving the stock ahead of time.  Of course given all the previous rumors of dividends, product launches, and stock splits that never materialized, market will be far more skeptical of unsubstantiated rumors.

NFLX is trading above recent resistance at $170.  At this point is seems the selling exhausted itself and the stock is looking to retest the 50dma.  If the market holds up, this is a far more interesting buy than short.

GOOG’s fallen out of favor and missing the markets move to all-time highs.  Is this part of the divergence that leads to a broad market top, or just a single stock getting sent to the dog house?  GOOG appears to be the biggest beneficiary of AAPL’s selloff.  Further AAPL selling, especially if it is due to losing market share to Android, will see much of those proceeds find a new home in GOOG.

LNKD is surging higher and just shy of making a new all-time high.  While not a technical 50-dma bounce, the stock is clearly finding support in the area and wants to continue higher.

Remember, 50% of a stocks move comes from the broad market.  If we see the markets breakdown, get out of these speculative stocks and look to buy them back after the market finds a bottom.

Stay safe