AM: More volatility

AM Update

Stocks are keeping the up and down routine going as we are selling off following yesterday’s new highs.  Is this just another buyable dip or the start of something more?  AAPL attempts another rebound, completely oblivious to the market weakness around it.

MARKET BEHAVIOR

Stocks dipped on weaker than expected private employment.  This pushed the marked through recent support at 1560 by late morning. If today’s declines hold through the close, this will be the eleventh consecutive alternating red and green day.  At some point this market will string together two up or down days and that could signal the next near-term move, either a breakout or breakdown.

MARKET SENTIMENT

The jobs data was decent, but fell short of expectations and given how much positive news has already been priced in, the market sold off.  It’s easy for a repressed market to top expectation and trigger a wave of buying, but inflated markets are far more vulnerable to disappointment because everyone bought the market ahead of time.

One concern about this market is the wedging higher.  This sucks in buyers and does not refresh the market by forcing out weak hands.  Dips refresh the market because it sends uncommitted holders running for cover, creating the a new pool of buyers to fuel the next leg higher.  But wedging lets these weak holders hold and actually increases the vulnerability of the market because it encourages even more weak holders to join the party.  Once the level of weak holders reaches critical mass, the market collapses in a rush of panicked selling.  Currently the market is down nearly 15-points and it feels like some of this froth is letting out.

TRADING OPPORTUNITIES

Expected Outcome:
Is today’s weakness just another buyable dip, or the start of something larger?  While I cannot say for sure what will happen next, I am concerned about the sustainability of the Q1 rally and think this is a normal and healthy time for the markets to rest a bit.  A day-trader can play these intraday swings, but there is too little upside left in this move to make it worthwhile for me.

Failing to hold support at 1560 is a concern, as would be a second day of selling on Thursday.  Any weakness is setting up for a buyable dip, we just don’t know if it will bounce off of 1560, 1550, 1500, or 1400.  Given how many shallow, buyable dips we’ve seen recently, I’m wondering how much money the dip-buying crowd has left.  Without dip-buyers and triggering stop-losses at technical support levels will  lead to a larger wave of selling than we’ve seen recently.

Alternate Outcome:
Record highs has all the worrywarts and naysayers out in force.  Many traders are anticipating this top and selling into the strength.  These seller will be the new buyers when the market heads higher.  Today’s weakness is an important turning point for the market.  It makes an interesting shorting opportunity, but if the market rebounds, it shows bears still cannot get the job done and the next move is higher.

INDIVIDUAL STOCKS

AAPL is attempting another rebound and while the stock is in the green, it’s off early highs.  This stock is in a world of its own and is up on a day where the rest of the market is off.  The iPhone has its own ecosystem and so does AAPL’s stock.  AAPL traders are oblivious to the world around them, showing they don’t care about macro fundamentals.  And given the disconnect from AAPL’s earnings data, micro data doesn’t matter either.  What are we left with?  Gamblers.  At this stage traders are just gambling in the stock.  When a stock is completely detached from macro and micro data, fundamentals don’t matter and anyone who is using these to justify their purchase is going to have a bad time.  This is an emotion driven trade and it can only be traded successfully when evaluated from a sentiment analysis.

And for all those “long-term investors” out there who are buying last decades big winner because they know it will come back, I only have one question for you, how many technology market leaders had strong runs 10-years after their initial breakout?  Most tech companies don’t even stay relevant for twenty years, let alone have a runaway stock.  MSFT, CSCO and DELL had great, decade-long runs but have been dead money ever since, even thought the companies are doing great.  Of course AAPL is different from those just like all those were different from the ones that came before them.  The names change, but investor attitudes stay the same.

Stay safe