AM: Rest day part 2

S&P500 daily at 1:28 EDT

AM Update

MARKET BEHAVIOR
Stocks are flat following yesterday’s modest dip.

MARKET SENTIMENT
There are plenty of risks out there, leaving many afraid of this market, but are these fears justified?  Lets look back over the last four-years to see how those fears turned out.  First there was complete and total financial collapse followed by a global depression.  Next was a double-dip recession.  We had Greece’s implosion and Euro contagion.  China’s hard landing.  Runaway inflation.  Several debt ceiling scares.  Obamacare followed by Obama’s reelection.   These were easily the scariest four-years in a generation, yet it was one of the best four-year stretches in market history.  How does that happen?

Some will say I am selective with my data, only going back to a generational low in the market, but what if we roll it back a couple more years?  In 2007 everything was great and few were worried.  We recovered nicely from the dot-com bubble and everyone was making money in real estate.  In late 2007 we were on the verge of one of the worst bear markets in history as the housing bubble was about to pop and take the global financial system down with it.  There were few times where risks were greater, but did anyone see it coming?  Was anyone afraid?   In the Fall of 2007, how many knew what Mortgage Backed Securities and Credit Default Swaps were, let alone sounding the alarm about them?  These risks were not simply missing from the financial news and coffee shops, but most of the pros on Wall Street didn’t have a clue either.  (The handful that actually saw it coming made ungodly amounts of money.)

We had some of the most extreme moves in market history and they were the exact the opposite of what the crowd feared.  The crowd’s fears are already priced in the market.  If people are promoting it, they already traded it.  If they have few worries talking about how much money they made, they are fully invested and the only thing they can do is sell.  If they are afraid of their own shadow, they are already out of the market and the only thing they can do is buy.  This is a difficult concept for people to trust, but if people are talking about it, we can ignore it.  Its worked over the last four years, just like the hundred years before that, and it will be the same over the next hundred.  I have no doubt there is another major bear market in our future, but it won’t be caused by any of the things people are taking about.

TRADING OPPORTUNITIES
Expected Outcome:
Stocks are resting for a second day following the 100-point run over the last few weeks.  This is normal and expected.  Most likely this is just another buying opportunity.

Alternate Outcome:
Watch for a break of 1600 when buyers fail to show up and support this market.  There is only so much money ready to buy this market and every upday burns through a little more of it.  It is obvious this market is immune to negative headlines, so we need to watch for weakening demand.

Trading Plan:
Until we get price action that tells us otherwise, assume the rally is intact.  Modest weakness here is a buying opportunity as long as we hold 1600.  Don’t short a break of 1600, instead wait for a series of lower-highs and lower-lows to develop first.  This market will not collapse in a waterfall selloff due to a negative headline, but waning demand typified by a series failed rebounds.

GLD daily at 1:28 EDT

INDIVIDUAL STOCKS
The selling in AAPL continues for a second day, but we are still holding $450.  As we discussed earlier, the rate of gains could not continue, so a pause and pullback were expected.  The thing we don’t know yet is if this is just a consolidation before assaulting $470 or exhaustion of dip-buying on our way to new lows.  A return to the 50dma is likely and how big money respond to this level will give us a strong indication about the future of this move.  If buyers step in and defend the 50dma, there is real money behind this move and we are finally in the expected rebound.  But if buyers fail to show up, the bounce is running on fumes and we will see new lows.

GLD broke support at $140 and but is trying to make a comeback.  A similar story as AAPL, there was a flurry of dip-buying, but is big money ready to follow on and continue supporting recent gains.  Personally I think the dip in Gold was a bit too easy and we likely have a bit more selling before this thing is done.  In volatile trades like this, it is best to take the easy profits because often they don’t stick around long before next violent swing.

NFLX is holding recent gains as buyers continue supporting these levels.  This is a risky hold, but a stupid short.  Don’t fight the trend in names like this.  Either buy it or stay out of the way.

Plan your trade; trade your plan