AM: Easy money keeps flowing

AM Update

MARKET BEHAVIOR
A volatile morning following Bernanke’s testimony before Congress.  A 20-point surge followed by a 15-point selloff and then a 10-point rebound.

MARKET SENTIMENT
Trade is calming down by midday, but we are clearly higher as the market liked what Bernanke said.  Easy money keeps flowing and equity investors continue buying.  There is this widely held view that easy money means stocks continue higher, but everyone is also waiting for the other shoe to drop when the Fed finally withdraws monetary stimulus.  Most expect this to end the rally.  While the logic makes a lot of sense, the majority is rarely right in the markets.  If the crowd expects us to tank when Bernanke takes away the punchbowl, it will likely do something else.  Our job as traders is to figure out what that will be.

The least expected outcome is continue strength after the Fed stops printing money and interest rates return to normal levels.  Since everyone expects the selloff, it is already priced in and will be a nonissue.  The offset is he will only do this when the economy is strong enough to stand on its own and revenues and earnings will justify higher levels.  The US will likely be the first to fully recover and end easy money policy, strengthening the US Dollar.  This is bad for US-based manufacturers, but good for consumers and companies that produce goods overseas, so plan your trades accordingly.

The other alternative is the markets collapse before Bernanke turns off the spigot.  He has zero control over the equities market and we are only headed higher because equity investors believe in the Fed.  In this instance perception is reality.  This could end one of two ways.  The first we run out of equity buyers willing to buy these levels and the market naturally rolls over due to lack of demand.  Major tops occur when everyone expects the good times to continue.  That was the case in 2000 and 2007; it will also be the case leading up to the next bear market.  The alternative is investors pullback the curtain and realize Bernanke is not as powerful as we are giving him credit for.  Stocks only rally on easy money because equity investors convinced themselves it should be so.  At some point the spell will break and selling will cascade as everyone rushes for the exit as the same time.  Nothing can stop herd buying and nothing can stop herd selling.  Just ask a longtime AAPL holder.

I have no idea what will happen, but I do know what everyone expects is the least likely outcome because it is already priced in.  To profit we need to see what other people don’t.  My guess is we will see a little of both.  A twenty-percent selloff in coming quarters that rebounds after Bernanke finally ends easy money.  Sell the rumor, buy the news.

TRADING OPPORTUNITIES
Expected Outcome:
There are a million reasons the market should top here, but it keeps going and we must respect that.  We don’t profit from the truth or common sense, we profit from price.  As long as the price continues higher, there is only one trade to make.

Alternate Outcome:
What goes up must come down.  The higher we go, the harder we fall.  Yada, yada, yada.  We all know this market will rollover at some point, but all the money is made figuring out when.  This market needs to fall a whopping 140-points before we can make a lower-low and threaten the viability of the up-trend.  We came a long way in a short amount of time, caution is prudent, even required, but calling this a top is clearly premature.  We will go down at some point but the market will reveal its intentions through weakening price-action first.

Trading Plan:
Stick with what is working.  An optimist should keep a trailing stop at 1650 to protect recent gains.  The nervous can sell proactively and wait for the next high-probability trade.  Please don’t short this market because its “gone too far”.  We heard that the last 200-points and while the short will eventually be right, early is the same thing as wrong.  A day-trader could short weakness, but take profits quickly because we must assume every dip will bounce until we see clear signs the market’s character is changing.

INDIVIDUAL STOCKS
AAPL is treading water above the 50dma.  Seeing buyers defend this level is encouraging and we actually have a chance at ending the streak of lower-highs.  I still believe sentiment is too bullish, but recent strength is setting up for a swing-trade.  Use the 50dma as a stop-loss and take profits shortly after the stock clears $465.  The buy and hold story behind AAPL is dead and the best way to make money on AAPL is swing-trading.  The big negative catalyst will be a warmed over iPhone5s.  If AAPL has something cool, they are going to release it to reclaim their reputation as a pioneer and innovator.  If we get more of the same, expect the stock to continue its slide as it loses market share to Android devices.  MSFT was flat for a decade with an impenetrable monopoly and strong pricing power.  What will happen to AAPL as its market share falls to single digits and profit margins come in?

GLD surged on Bernanke’s comments, but has given up most of those gains.  Like AAPL, GLD is a crowded trade and everyone who wants some already has some. meaning there is no one left to buy.  At some point the dip buying will dry up and we will see new lows.

Plan your trade; trade your plan