AM: Where’s the bounce?

S&P500 Daily at 1:27 EDT

AM Update

Stock struggle to come back after yesterday’s selloff.  Will they continue the pattern of bounces or give us our fist back-to-back down days in nearly three weeks?

MARKET BEHAVIOR

Stocks bounced back from yesterday’s selloff, but only recovered a fraction of those losses by late morning.  We are trading in the high 1550s, but struggling to break above 1560.  If stocks close in the red this afternoon, it will be the first back to back loss in nearly three weeks.

MARKET SENTIMENT

Wednesday’s high-volume selloff shook some complacency from the market and reminded people there is risk in this game.  Up to this point every dip has been buyable and we are seeing signs of an attempted bounce this morning.  While every previous selloff bounced, we need to remember that each rebound consumed a portion of the available pool of buyers.  After a certain point we run short of new buyers and the market falls under its own weight regardless of positive headlines or outlook.

While we know what is coming, the far more difficult part is timing the trade.  Every rally tops and this one will be no different.  All the bears calling for a pullback since January 2nd will eventually be proven right, but that is little consolation to their portfolio that was decimated by the premature call.  Markets go up and they go down, everyone know that.  All the money is made in figuring out when.

This rally is beyond obvious when mainstream media is promoting all-time highs in the Dow and S&P.  Many perma-bears are coming around because no one want to hear stories of doom-and-gloom anymore.  While I count myself as an optimist and a firm believer in the resilience of our economy, markets moves in waves.  The overshoot to the upside and downside every time, always have and always will.  The savvy trader exploits these swings in sentiment.  Last November saw a wave of pessimism hit the markets and lead to an oversold condition as traders bailed out for no other reason than everyone else was selling.  This herd mentality skews moves to the upside too.  When the crowd is calm and complacent, we let down our guard too.  The ironic thing is the market is safest when people are most scared and riskiest when everyone is most comfortable.

TRADING OPPORTUNITIES

Expected Outcome:
I wish I had a crystal ball and knew for sure if this dip was buyable or the start of something larger, but the best I can do is trade probabilities   Its been a good run, the mass media is promoting all-time highs, we just started a new quarter, and fear of an economic collapse has been replaced with fear of missing the rally.  All these conditions point to a market closer to the end than one that still has room to run.

There is a lot of positive news already built into the market and simply meeting expectations is not going to move us higher.  On the other hand anything that falls short will catch investors off guard and rekindle those pessimistic and irrational fears.  There is no reason this market cannot bounce back today, but a second consecutive down-day and close under 1548 will rain on this parade.

Alternate Outcome:
The last few weeks of sideways trade facilitated profit taking and gave nervous holders the opportunity to bail out.  Wednesday’s high volume selloff also cleared dead wood and tempted bears to short this market.  These sellers are creating fuel for the next rally leg.  Holding above 1550 and reclaiming 1560 by Friday shows buyers are still supporting this market and the next move is higher.  No matter what the daily price-action shows, the rally remains intact until we start making lower-lows and lower-highs.

AAPL daily at 1:28 EST

INDIVIDUAL STOCKS

AAPL fell back into the $420s and any hope of resuming the previous rebound is fading fast.  We are within $10 of setting a new low and expect a wave of selling to hit the stock if it falls to this level as stop-losses and shorts are triggered by this widely followed technical level.  Eventually AAPL will boost its dividend and buyback, upgrade existing products, and launch new products, the question is if these will be enough to bring a lethargic stock back to life.  Once a stock loses its aura of invincibility, it is really hard to get it back.  The tech industry is littered former pioneers and innovator who continue operating great companies, but their stocks have been dead money for years. Is AAPL on the verge of joining that club?

NFLX is struggling since it broke the 50dma yesterday.  This stock is vulnerable to broad market weakness and is a poor place to hide out if anyone expects a near-term selloff.

Stay safe