AM: Another pause

S&P500 daily at 1:17 EDT

AM Update

MARKET BEHAVIOR
Today’s trade is a mirror image of yesterdays.  We gapped lower at the open, selling continued until it found a floor by  mid-morning, and rebounded into midday trade.  After a large directional move through most of May, it is normal to consolidate those gains.  At this point there are no indication recent weakness is anything more worrisome than typical consolidation.

MARKET SENTIMENT
Today is another obvious short entry for the doubters and bears.  I am sympathetic to their point of view given how long and far this market came without pausing, but doubting this rally is still the popular thing to do and is why more upside remains.

Recent volatility is shaking out weak holders and late buyers, as well as seducing bears to go short.  The problem is much of this selling is already behind us.  When everyone expects something nasty, they are either already out, or act quickly when they see the first cracks.  Their trigger finger lead to last week’s stunning 2% intraday reversal.  Even bulls are afraid of this market and are waiting for a pullback before buying more.

We must not confuse trend with sentiment.  Just because the trend is higher doesn’t mean the market is overly-bullish.  In fact the reason the market keeps going higher is because it was overly-bearish and there was an ample supply of traders out of the market available to chase it higher.  At some point we will run out of buyers, but the supply remains plentiful as long as people keep doubting the sustainability of this market.  The trend is strongly higher, but we are still not overly-bullish.

TRADING OPPORTUNITIES
Expected Outcome:
Rallies take breaks and after four-weeks of nearly straight up, this one is entitled to some rest and relaxation.  There is no reason to jump on the bear bandwagon just because we are not going higher every single day.  There is a time and a place to be bearish, but a couple percent from all time highs is a tad premature.  We don’t need to own this market here and the cautious can wait for the next high probability trade, but  until proven otherwise assume the rally remains intact and dips are still buyable.  “Sell in May” is quickly running out of time and expect similar strength to cary through summer.

Alternate Outcome:
This rally will breakdown just like all the ones before it.  No one know when or where, so we must keep a careful eye on it and look for material violations of the up trend.  Failing to make higher-highs and breaking support are signs buyers are no longer standing behind this market and the widely expected pullback is finally here.

Trading Plan:
Last week’s bounce is still intact as long as we continue holding 1635 and this is a reasonable stop for aggressive dip buyers.  More meaningful support is back at 1600 and the 50dma.  Break these levels and we have to question the viability of the rally.  Bouncing off this level creates another attractive dip-buying opportunity.  After such a strong move, look for more sideways trade here and be willing to buy weakness and sell strength as the mare consolidates recent gains.

INDIVIDUAL STOCKS
AAPL is still holding the 50dma, but failing to continue the rebound.  The longer we maintain these levels, the more meaningful this support level becomes, but this is a double-edged sword.  It shows big money is buying shares at these levels, but it also means a large pile of stop-losses are accumulating under this widely followed technical level.  A dip under support could trigger another wave of selling.

LNKD daily at 1:17 EDT

In an interview yesterday Cook talked about the potential of wearable technology, but also the hurdles.  Without a doubt there is a market for a smart-watch, but realistically it will be the modern equivalent of the calculator watch.  Smartphones have largely displaced wristwatches as timepieces, but watches remain popular as pieces of jewelry.  The biggest opportunity for a smart-watch is not some geeky piece of hardware, but for existing jewelry watches to incorporate smart displays showing text messages and caller ID.  Cook pooh-poohed Google Glass, and I agree the technology is premature, but if we look out 20-years from now what will be the preferred method of interacting with our devices?  Will it be a pack-of-cards sized device in our pocket?  A one-inch display on our wrist?  Or a virtual reality display that supplements our existing view of the world?  Fighter pilots already use HUDs extensively because of the ease of displaying complex information and some future iteration of Google Glass is clearly the way of the future.  GOOG is still at least 5-years ahead of the curve on this and it is not a reason to own the stock, but they will be the best poised to exploit this technology when it becomes viable.

Speculators are losing their stomach for speculative names like LNKD and NFLX.  It is best to sell momentum stocks into strength because the floor falls out from under them quickly.  I don’t think the top is in for either of these companies, but they will feel the weight of market uncertainty over the near-term.  Once the rally resumes, look for new highs.  Remember, buy low, sell high.

Plan your trade; trade your plan