AM: Modest selling

AM Update

MARKET BEHAVIOR
Stocks opened weak on the first dip since last Friday’s low.  Some selling after five-days of gains is normal and expected.  The market is finding support at 1580 in mid-day trade and the breakout remains intact as long as we hold 1570.

Gains over the last five-days were the largest we’ve seen since the start of the year.  Accelerating gains after such a long run is something to be wary of, but while they are impressive, they have not materially broken the upper trend line.

MARKET SENTIMENT
This week was another example of buying the dip being the right trade.  Many were anticipating a larger selloff, making the rebound more likely.  All the profit-taking in March’s consolidation was unable to weight on the market.  The result was higher prices once that selling exhausted itself on last Friday’s disappointing employment.

It’s become painfully obviously this market will not breakdown on news.  The only thing left is running out of buyers.  This means we will slide lower while everyone is still looking up and is a more difficult turning point to spot than a clear shock to the system.

The shift will occur when pessimists give up fighting the tape.  These are the last people willing to embrace the rally and thus the last buyers to keep this thing moving.  The picture is a little more complicated when we include international investors fleeing precarious economies and bond investors warming up to equities again.  Chances are those that fled the Cyprus’ fallout have already done so.  If they were not motivated enough to move immediately after events, they are even less likely now the situation is calming down.  As for bonds, they are coming back and rising prices takes pressure off of bond holders.  The last buyer I can think of is the incremental IRA investor sending in his contribution before the April 15th deadline.  How many of these above buyers can we count on in coming weeks to continue pushing this market higher?

No matter what the Fed does, equity prices will only go higher when people actually buy equities.  When everyone is in equities because they think prices will continue higher is exactly when they top and nose over due to lack of demand.  Until Ben starts buying stocks, his influence over the equity markets is dependent on equity investors buying into the hype.

TRADING OPPORTUNITIES

Expected Outcome:
I still don’t feel comfortable with this market, but holding above prior resistance at 1570 shows the breakout is alive and well.  We are at the upper end of the trading channel.  A break above this trend-line will signal exhaustion and should be sold, not bought.  A modest dip to the lower trend-line could be another buying opportunity as long as we hold key support levels.

Alternate Outcome:
While the trend is solidly intact, it is hard to embrace this rally after five-months of gains and an unbroken streak of rebounds.  We are also in the fifth-year of the larger bull market. While everything looks good, that is what always happens at tops.  I still believe in the secular bull, but every decade long run has bounds dramatic of weakness.

INDIVIDUAL STOCKS
AAPL retreated to $430 and is largely trading sideways ahead of earnings in two-weeks.  Unless we get leaks and believable rumors, expect the stock to stay around these levels because neither bulls nor bears are likely to change their mind in coming days.

NFLX is higher on a day the market is selling off.  Look for short-covering to continue pushing this stock higher, assuming the broad market holds up.

LNKD recovered from early weakness and reclaimed $180.  The bounce off of $175 shows there are more willing buyers at these levels than sellers.  Holding LNKD here is only for the bravest of the brave, but shorting this stock here is just plain foolish.

AMZN added to yesterday’s break above the 50dma.  With so many bulls and bears trading the breakout/breakdown, the smart plays has been swing-trading the up and down.  This probably won’t change until earnings where we will finally see a more directional move.  My inclination would be to wait for earnings and trade resulting move.

GOOG is largely mirroring weakness in the indexes.  What was AAPL’s loss has been GOOG’s gain.  If AAPL disappoints on earnings, look a large portion of that money to come GOOG’s way.

Stay safe