PM: Light volume saves the day

PM Update

MARKET BEHAVIOR
Stocks continued the bounce on unusually light volume.  Over the last few weeks the biggest volume days have all been marred in red ink, while subsequent rebounds only attracted modest groups of buyers.

MARKET SENTIMENT
It is hard to get excited about this market.  Every dip and rebound simply ends in another dip and rebound.  At some point we will break out of this range, but it already dragged on longer than either bulls or bears expected and we are still stuck in the middle.  Bulls are happy to buy the dips, but back away when the market approaches the upper end of the range.  A similar but opposite reaction from Bears.

If only volume was as insightful as some people make it out to be.  I’d love it if all we had to do was follow the volume, but unfortunately it isn’t that easy.  The conventional view of our current situation is high-volume selling represents institutional money bailing out because they are the only ones with accounts large enough push volume this high.  If big money is getting out, we don’t want to stick around either.  But what if high-volume selling is actually bullish?  What if it represents the churn in ownership necessary to refresh the rally?  Capitulation bottoms always happen on huge volume because it is the last of the weak hands getting flushed out.  Could that be happening here?

Earlier in this rally low-volume buying lead to further price gains, but that was under that market’s personality and recent volatility and flat trade indicate this market’s personality is different.  Can we still assume light volume equals higher prices?

In reality volume is just one of many pieces to the puzzle and we have to look at the entire picture.

TRADING OPPORTUNITIES
Expected Outcome:
We ended the day above 1560 and holding this level into Wednesday shows there is still life left in this bull.  Markets roll over fairly quickly as they run out of new buyers.  Weakness on Tuesday or Wednesday will show that, but four-days of buying is more than the typical dip-buyers can muster and shows wider follow-on buying from a larger pool of investors.

Alternate Outcome:
I am still wary of this market and a fourth test of 1540 is unlikely to bounce, but we have to trade the market we are given and often that means admitting we are wrong and changing our view of the market when confronted with new information.  Finishing above 1560 on Wednesday shows there is still life in this bull and we will make a run for 1597.

INDIVIDUAL STOCKS
Sometimes the stupidest ideas make for the best trades.  I was widely ridiculed a while back for suggesting MSFT was a better buy than AAPL.  Everyone knows MSFT is garbage and AAPL is a crown jewel.  But therein lies the problem.  MSFT was priced as garbage and AAPL a crown jewel.  Obviously AAPL was overvalued and MSFT undervalued and that is exactly how we make money in the markets.  Any ‘idiot’ who put this pairs-trade on at the start of year (buy one and short the other) made 8% on the MSFT long and 26% on the AAPL short.  So much for conventional wisdom.  Our goal isn’t to recognize what everyone already knows, but see what they don’t.  Obvious trades don’t work and counter intuitive ones do.

Speaking of counter intuitive, NFLX popped 25% in after-hours, smashing expectations and sending shorts running for cover.  The obvious short keeps going higher and confident bears are losing money by the truckload.  Chances are they will eventually be right, but we’ll have to put that on their tombstone because they won’t survive long enough to see it.  This game humbles everyone and we must always expect the unexpected because the expected is already priced in.

Plan your trade; trade your plan