PM: Bad is good

PM Update

MARKET BEHAVIOR
Stocks reclaimed all of yesterday’s selloff and are just shy of 1600 for the third time.  The market established a mini-trading range between 1580 and 1600 over the last week and a half.  Yesterday it felt like we wanted to breakdown, today everyone is looking up.  It is hard to predict the intra-day moves, but the trend remains higher and is the better trade.

MARKET SENTIMENT
Friday’s headline event is the monthly employment report.  February’s numbers were shockingly bad and dramatically lowered expectations for April’s.  But as disappointing as February’s were, you wouldn’t know it from looking at the stock market.  Last month’s employment report preceded a 50-points surge that smashed all-time highs.

This market shrugs off bad news like no other and we certainly shouldn’t fear a bad employment report tomorrow.  A big reason is traders are buying because of monetary easing.  The logic goes, the worse the economy, the more money the Fed pumps into the system.  In this perverse, bizarro world, bad is actually good.  Does this mean good is bad?  Hard to test this theory since we haven’t seen good news in a long time.  But if this market became addicted to easy money, a strengthening economy threatens that and good could be bad.    Between February’s unexpectedly bad showing and Sequester layoffs finally kicking in, it is hard to imagine a legitimately good employment report Friday.  We could easily beat the pathetically low expectations, but that is simply less bad.  We are still a long way from posting healthy employment numbers that signal a strong and vibrant recovery.

TRADING OPPORTUNITIES
Expected Outcome:
As we know, this market does not respond to fundamentals, so we are wasting our breath spending more time on them.  Buyers keep buying every dip and today’s rebound shows they still have sufficient numbers to support this market.   Expect the zigzag higher to continue as big money buys every dip, but dials back purchases near new highs.

Alternate Outcome:
Every day brings us closer to the dip that doesn’t bounce.  I don’t know if it is next week, next month, or next year, but I do know it is coming.  We need to keep a lookout for the end of this rally because it will happen when most people least expect.  This rally leg lasted longer than others because it is immune to negative headlines.  While that often takes down other markets, this one needs to run out of buyers while everyone is still expecting higher prices.  No matter how bullish people are, once we run out of buyers there is nowhere to go but lower.

Trading Plan:
The rally remains on firm footing unless we dip under 1570.  From there we likely bounce off the 50dma and the bull is not in serious jeopardy until we slip under 1540.  Stick with what is working and expect the grind higher to continue in spite of, actually because of, all the calls for a top and selloff in May.  Use a trailing stop to protect gains and don’t try shorting this market until we see buying stall as seen by lower-highs and lower-lows.

INDIVIDUAL STOCKS
AAPL holds the 50dma for a third day.  Maintaining these levels into next week demonstrates real support for the stock.  As long as we stay above the 50dma the stock is holdable, but keep it on a tight leash and take profits early and often because it will be a choppy assent due to all the overhead resistance weighing on the stock.

LNKD dropped sharply in after hours trade on a disappointing outlook.  Even with a $20 selloff, the stock is only back to levels from a couple of weeks ago.  It is tempting to hold a stock that we think is the next 10x winner, but more often than not we are better off taking profits after such a strong run.  The stock probably has more upside, but it cannot keep up its current rate of gains.  Lock in profits and look to reenter at a better price.  We’re in this to make money and we can only do that by selling our winners.

Plan your trade; trade your plan