PM: Half-full or half-empty?

PM Update

A little something for everyone as the market gapped lower, but recovered a large chunk of the losses.  Do we buy the dip or sell the bounce?  LNKD’s bucked the weakness and shows there is still strong demand.

MARKET BEHAVIOR

Depending on your point of view, it was a half-full or half-empty day.  Stocks plunged at the open on anemic job growth, but recovered more than half of those losses and finished above key support at 1550.   Bears will point to the selloff and bulls will point to the rebound.  As exciting as the day seemed, volume was simply average and neither buyer nor sellers piled in or out of the market.

MARKET BEHAVIOR

How do you boil a lobster without him realizing it?  One degree at a time.  If the market peaked on Tuesday, bulls are getting roasted one degree at a time.  Rattle their nerves with a poor open, but get their hopes up with an encouraging rebound.  Of course the same could be said of bears and these dips sucking them back in on the short side only to blow them out on the next short squeeze.

What happened today?  Stocks sold off sharply as concern over a weak recover reared its ugly head.  They opened on the lows and rallied 13-points as dip buyers jumped at the opportunity to buy stocks at the lowest level in nearly a month. Every other dip was a buying opportunity so obviously this was a great time to snap up discounted shares.  The problem is that whole “obvious” thing.  If casual retail investors know you “don’t fight the Fed”, doesn’t that mean QEfinity is already priced in?  If everyone already buys into the ideal of a “Bernanke put”, who is left to buy?

Last year everyone was skeptical of QE3 and EQfinity, but up near all-time highs everyone is a believer.  Where did all the cynics go?  Where did the worry about the Fiscal Cliff, Sequester, and Debt Ceiling go?  It’s not like our politicians fixed anything, they just kicked the can down the road and the market has a notoriously short memory.

Now don’t get me wrong, I’m not one of these perma-bears and have been extremely bullish since the November lows.  In fact I think this is the early stages of the next massive secular bull market.  When everyone says buy-and-hold is dead is the best time to buy-and-hold.  But I also know the market moves in waves and it’s been a while since we had our last corrective wave. I’m a contrarian by nature and when everyone is buying the dip, I’m shorting the bounce.

TRADING OPPORTUNITIES

Expected Outcome:
This morning’s selloff and rebound shouldn’t surprise anyone.  Bulls had to thread the needle between too weak job growth and too strong job growth to continue the rally.  The selloff was nearly inevitable since so few buyers were left after a 4-month rally.  But at the same time habits are hard to break and everyone who made money buying the dip had to come back to make easy money.  And given today’s rebound that was the smart play, but profits are only real when we sell.  Anyone buying the dip might come to regret it next week when follow on buying fails to materialize because so few buyers are left to keep pushing prices higher.

Given how far along we are in this rally, buying the dip is the riskiest its been.  That doesn’t mean it cannot bounce, simply every rebound brings us closer to the one that doesn’t.  I don’t have a crystal ball, but I know probabilities say we are closer to the eventual correction and there is more risk than upside at this point.

We will know early next week if the market can hold 1550 or if buying dries up and we continue lower.  Anything less than maintaining 1550 through Wednesday is a concern for bulls.

Alternate Outcome:
This market grew fat feeding on premature pessimists calling a top.  There is no reason it has to top here and can easily continue higher, especially if many are predicting a top.  Sideways trade since early March flushed out profit-takers and weak holders.  These will be the buyers that push the market higher if we bounce back.  While I don’t believe this is the high-probability trade, I am very aware it is a possibility   If the rebound continues and we regain and hold support, that shows buyers are still behind this market and I am way too small to argue with them.

INDIVIDUAL STOCKS

AAPL flirted with new 52-week lows and is just a few dollars above this key level.  Expect a wave of stop-loss and short selling to hit the stock if it dips under $419.  At this point it is obvious the break above the 50dma was nothing but a head fake built on the hopes of desperate holders.  It is hard to find anyone bearish on the fundamental story behind AAPL, meaning most still view it as a value.  The problem is no one is left to buy the stock since everyone already owns it.

LNKD’s strength is impressive and shows there is still ample demand for this stock.  But a weak market will take it down with the rest, so this is a poor place to hideout if anyone expects near-term broad weakness.  When the market resumes the rally, look for this stock to continue leading.

Stay safe