PM: Hold ’em or Fold ’em?

PM Update

Another new high as this rally just doesn’t know when to quit.  AAPL on the other hand cannot figure it out and gave back all of its early gains.

MARKET BEHAVIOR

Stocks rebounded from Monday’s selling and set new intraday and closing highs.  Market traded as high as 1573 before giving up a portion of those gains in afternoon trade.  Volume was below average, but the highest in a couple of weeks.  The all-time intraday high is the only old record left standing and sits less than six-points away.  If the market ends in the green on Wednesday, it will be the first back-to-back up days since March 14th.

MARKET SENTIMENT

The whipsaw grind higher on low-volume continues.  Through this sideways trade, buyers are buying and sellers are selling, but more important, who is selling and who is buying?  Is smart money locking-in profits by selling to dumb money?  Or is impatient, dumb money getting nervous and selling to smart, patient money?

Without a doubt we’ve seen profit-taking at these all-time highs as many traders anticipate near-term weakness, but so far that selling has been matched and even exceeded by the appetite for stocks.  Every dip has been a buying opportunity and this pattern clearly lasted longer than I expected.  The thing I need to figure out is if I am just early, or if I am completely wrong.  There are many reasons for the market to pullback here, but the only indicator that matters, price, continues inching higher.

For market to continue higher, we need to find new buyers.  These could be premature sellers coming back into the market.  It could be remaining holdouts still watching this rally from the outside.  It could also be reallocation.  As Greg pointed out in the AM post’s comments, small-caps did not enjoy the SPX’s strength.  Are traders selling smaller stocks and rolling that money into safer blue-chips?  Is the market seeing inflows from the bond market as retail investors are chasing all-time high headlines?  If the rally continues, it will be on the back of one or more of these themes.

TRADING OPPORTUNITIES

Expected Outcome:
The market is holding up and we have to respect that.  Another close above support on Wednesday will show there are still more willing buyers than sellers and we should expect the next move to be higher.  That doesn’t make the market an automatic  buy because we have to consider the unfavorable risk/reward at these elevated levels, but it will certainly indicate shorting the market is premature.

Failing to hold 1560 on Wednesday is a bigger deal and shows bulls struggling to find new buyers at these record levels.  The market will return to normal volume in the near future and if buying cannot keep up with selling, that will finally be the start of the long-awaited pullback.

Alternate Outcome:
The market marches higher no matter what the headline or how compelling the bear case is.  This rally outlasted countless pessimistic predictions and there is nothing to say it cannot continue humiliating the next wave of top-pickers.  A slowly improving economy will continue convincing investors light on equities to wade in.  Buying by these late-to-the-party buyers is what will keep this rally going.

INDIVIDUAL STOCKS

AAPL turned a nice bounce into another warning flag as the stock reversed from early gains and finished near flat.  This is a stock where everyone is trying to will it higher on hope and hype, but no one outside of the cult is buying it.  Valuation doesn’t matter, cash hoard is meaningless, and history of innovation is discounted.  No matter what the believers point to, the larger investing world remains skeptical and the stock continues its slide as the faithful start giving up.  When a stock has everything going for it, but still cannot get out of its own way, that is a bad situation to get involved in.  Will AAPL recover its innovation leadership position, or is this the ’80s all over again where AAPL will make a fantastic niche product with 3% market share, like the Mac at the turn of the century?

Stay safe