PM: What comes next?

PM Update

Markets tested support at 1550 and AAPL had its worst day since the post-earnings plunge.

MARKET BEHAVIOR

The up-down pattern continued with Monday’s selloff on the heels of Thursday’s record close.  This was the ninth consecutive day of alternating red and green.  Volume was well below average as traders continue their indifference toward this market.

MARKET SENTIMENT

Buyers are not clamoring for the breakout and holders not are rushing for the exits on weakness as this low-volume trend continues into the 4th week.  This can be both bullish and bearish depending on which side is the first to return in force.  Holders continue holding for larger gains and few are locking in profits at these levels, keeping supply tight.  One the other side buyers are restrained, either because they still don’t believe in this rally or alternately everyone already bought in and there are few left to buy.

The big difference is no one needs to buy, but there will always be sellers.  There is only one reason to buy, to make money either through capital appreciation or dividends.  If traders do not think a stock will go up, there is no reason to buy it.  But selling is a different animal and there are many reasons people sell stocks.  The obvious is they think it will go down, but people also sell to pay living expenses or a pension fund’s distributions to pensioners.  Money managers also sell things that go up a lot and skew their original allocations.  In the latter situations, a money manager can still be bullish on a stock or the market, but they need to sell for other reasons.  This dynamic is why a market needs a catalyst to go up, but will fall under its own weight in the absence of a reason to buy.

TRADING OPPORTUNITIES

Expected Outcome:
Even with the wind at its back, this is a challenging market to own.  Given how far we came over the last 4.5 months, it is hard to project more big gains before a normal and healthy pullback.  We can debate if the pullback will be 5% or will cascade into a 20% bear market, but either way we have at least 75-points of risk (5%).  Some of the more optimistic projections call for a continued rise to 1600 before topping.  That gives 75-points of risk for 38-points of upside.  It is hard to get excited about that trade even before we factor probabilities into the equation.  If we wouldn’t buy the market here, we shouldn’t own it either.

Alternate Outcome:
Momentum is clearly higher.  It is far more profitable to bet on a continuation than a reversal because a market continues countless times, but reverses only once.  Holding support at 1560 through Wednesday, or 1550 through Friday shows buyers are standing behind this market and it is not in imminent danger of imploding.  There is little risk to this rally as long as it holds 1550 and we don’t establish a lower-low until we fall under 1538.  While I am cautious of this market, I am keeping an open mind that this rally still has legs

INDIVIDUAL STOCKS

AAPL was hammered and finished at the lows of the day.  The 3% loss was the worst showing since 12% earnings plunge.  Volume was below average and failed to signal a high-volume capitulation bottom, meaning more weakness is likely.  The stock is within $10 of a new low and if it cannot hold recent support, look for a dip to the $400 level.  The fate of this move likely rests in the quarterly earnings in a few weeks.  This is purely anecdotal on my part, but I’m always on the lookout to see what phones people are using.  I see lots of iPhone4 and 4s, but very few iPhone5.  The other tidbit is few people are curious about my iPhone5 and I’ve only had two people comment about it since I got it on the day it came out.  Again this is purely anecdotal evidence, but it seems unlikely they will report blowout iPhone5 sales numbers based on how few I see in the wild.  Given the widespread bullishness still surrounding this stock, it sure feels like the risk remains to the downside.

Stay safe