LA: Can bulls hold on?

S&P500 weekly at end of week

Look Ahead

MARKET BEHAVIOR
The market remains range bound even though we widened the window in recent weeks.  March traded primarily between 1540 and 1560.  A couple breakouts and breakdowns later, that range stretched from 1536 to 1597.  Twenty-points of volatility exploded to sixty since the start of the second quarter.  Increased volatility on the heels of a steady six-month rally hints at a shift in market personality and often signals the trend is on the verge of changing.

MARKET SENTIMENT
This rally was supposed to pullback January 3rd after the massive and “unsustainable” Fiscal Cliff pop.  Yet here we are nearly four-months later and a hundred points higher.  Like a broken clock, the naysayers will eventually be proven right if we wait long enough, are we finally getting close to that point?

Our job is not to know what the market will do next, but what it is more likely to do.  This is a very subtle, but important distinction.  No one knows what will happen tomorrow, but we can combine herd psychology with an understanding of what other traders think and how they are positioned.  There is no way to know what the news will be, but with some insight we can make an educated guess about how the market will respond.   Remember, while the news is random, the crowd’s reaction to it is not.

This market largely ignored any and all negative headlines on our climb to all-time highs.  Should we expect that to change anytime soon?  Some expected US markets to breakdown on China data two-weeks after it ignored the most sluggish employment report in nearly a year.  Really?  This market went from fearing every headlines six-months ago to completely ignoring them.  I don’t know what tomorrow’s headlines will be, but I do know this market doesn’t care about them.

This cannot go on forever and at some point the market will pullback; it always has and it always will.  If it won’t implode on a negative headline, what’s left?  Too optimistic.  Once all the chasers are in, no one is left to buy and the market will fall from a lack of demand.  This is the topping scenario we are watching for.  Unfortunately identifying the number of chasers left is far more ambiguous than trading some concrete and timely economic data point.

Previous market tops since the 2009 lows were abrupt, headline driven selloffs.  The selling was aggressive, but short.  Within a week or two we found a bottom and resumed the up-trend after a brief basing period.  If this market tops differently, will the resulting selloff be different too?  Something to keep in the back of our mind as we watch this market’s next move unfold.

TRADING OPPORTUNITIES
Expected Outcome:
There are plenty of reasons for the rally to continue here, namely the number of people still expecting a pullback.  But I just don’t feel comfortable owning it here.  In a rally of this age, the market no longer gets the benefit of doubt and it needs to prove itself, until then I will remain cautious.

Market selloffs take occur quickly and holding 1550 through Wednesday shows bulls still have the upper hand.  From there expect the next move to be higher.  But if the market runs into resistance at 1570 and rolls over, another test of 1540 is unlikely to hold.  Like a cat, a rally only has so many lives and we’ve used several of them in recent rebounds.  We are getting closer to the dip that doesn’t bounce with every passing day.

Alternate Outcome:
Rallies often go longer and higher than anyone expects.  That is clearly the case here and it could continue proving the cynics wrong.  Many traders locked in profits over the last six-weeks of nearly flat trade and these are the next buyers ready to chase the next leg higher.  The most obvious sign the rally still has legs is seeing it head higher.  Regaining and holding 1570 is impressive and breaking above 1600 will put all this head-and-shoulders nonsense behind us.  But no matter what the market does, there is no reason to own what we don’t understand and trust.  Most traders know how to find good trade, but they end up giving back all those profits by forcing an ill-conceived trade when they get a little too cocky.

INDIVIDUAL STOCKS
AAPL’s make or break moment is just around the corner.  Even if the company modestly beats expectations or announces a dividend increase, the resulting strength is a selling opportunity, not a buying one.  This stock was built on 30%+ growth and unless it puts up those kind of numbers, it won’t regain its former glory.  The stock is now a dividend/value investment and one last selloff will chase off the leftover growth holdouts.  Without a doubt AAPL has a future and is a money printing machine, but the same can be said of MSFT, INTC, and CSCO.  How many growth investors are still hanging out in these 1990 growth stocks?  The same maturation is happening to AAPL.

It wouldn’t surprise me if GLD saw more selling this week.  We’ve seen the dead-cat bounce as anxious dip-buyers snapped up discounted shares.  The unfortunate thing for them is what is cheap, usually gets cheaper.  It is far easier to buy the overdone selloff than throw on a short, meaning this is the wrong place to buy.  Buying when there is blood in the street is a good way to get killed.  The key to successful dip-buying is having the patience to wait until the blood is dry.

Plan your trade; trade your plan