AM: Buy the dip

AM Update

MARKET BEHAVIOR
Stocks are modestly lower in early trade as last week’s selling continues.  We are still well above major support at 1600 and the 50dma, but violated minor lows at 1635 last week and undercut Friday’s lows this morning.

MARKET SENTIMENT
The Sell in May folks are now promoting Sell in June.  It doesn’t have the same ring to it, but we shouldn’t let semantics get in the way of stubbornness.  Bears also point to the Hindenburg Omen, a scary warning of imminent calamity.  Add to this the already pervasive claims this market is extended, over-bought, and overly-bullish.  No one trusts this market and people invent new reasons to stay away each week.

We all want to buy and hold the next big move, but it is our innate fear of heights that keeps most out of the biggest winners.  We are natural cynics and distrust anything that moved too far, too fast.  This is a mixture of disbelief and regret we missed the big move everyone is talking about.  We want to join the party, but insist on waiting for the inevitable pullback so we don’t look foolish chasing a hot stock, or in this case market.  But typically the market either never pulls back, or when it does, we chicken out because it looks like it is breaking down.

Fear and indecision is what keeps most out of the best, easiest, and safest moves.  This market rallied over 300-points since the November lows and people still don’t trust it.  This has been one of the easiest times in market history to hold stocks as we marched higher week after week with no real pullbacks along the way, yet most are still afraid of it.  There will eventually be a time when everyone finally embraces this market and is truly over-bought, but when traders and headlines scream this is the top every time we dip 20-points, we know we are not there yet.

This market will top, but only after everyone stops expecting it.  Supply and demand dictates when everyone fears a correction, they sell proactively and aggressively at the first signs of weakness.  With so many people watching this market with an itchy finger, much of the defensive selling is already behind us as many blew their load early.  That premature selling takes supply out of the market and makes it easier for the market to bounce.  Further, these early sellers are the next buyers as they chase the market higher.

Many traders are waiting for the monthly employment report on Friday, but it has been a year since the market reacted strongly to an employment report.  It was a big deal when we transitioned from job losses to gains,but the market expects modest gains and as long as we keep getting them, this report is simply talking-head fodder.

TRADING OPPORTUNITIES
Expected Outcome:
Friday’s weak close did not lead to an avalanche of selling today, and while we are modestly lower, the market is calm and rational.  Unfortunately for us, markets cannot go up every day, so selling of 10, 20, and even 50-points is normal and expected.    Resist the urge to jump out the window every time the market doesn’t go up.

The market is likely transitioning to a flat trading range for the remainder of the summer.  I’m just spitballing things here, but expect the market to stay between 1600 and 1700 over the next couple months.  The best trade is buying weakness and selling strength.  Savvy and experienced investors can sell option premium.

Alternate Outcome:
While it doesn’t happen often, sometimes the crowd gets it right.  This market could implode Hindenburg style and we cannot stick stubbornly to our original thesis once the market moves convincingly against us.  We came a long way and at some point we will run out of buyers.  Once that happens it doesn’t matter what the headlines are or what the Fed does, without demand markets tank.  Assume the uptrend is intact until it proves otherwise, but once it does, be flexible and quick enough to profit from the new trend.

Trading Plan:
Look for a bounce to buy the dip and use the recent lows as a stop.  Assume the market is stuck in a range and take profits as we approach recent highs.  The aggressive can then reverse and short the subsequent weakness.  A break below 1600 or break above 1700 means we need to watch for the next directional move.

INDIVIDUAL STOCKS
AAPL continues finding buyers above the 50dma and shows legitimate support for the first time since the selloff began.  I suspect most new buyers are coming for the recently raised dividend and these investors are notoriously price sensitive.  Growth investors are shying away from this name and it is unlikely we will see them push this stock any time soon.  A trader can make money here, but it takes a different strategy than the easy buy-and-hold days of years past.

GLD‘s volatility continues as we jump 2% today following Friday’s 2% decline.  Speculators and day-traders are gaming the metal trying to scalp a profit here and there.  The loser is the cautious investors seeking safety and security.  It will take a while for the commodity to regain its safe-haven status and expect recent volatility to continue.

Plan your trade; trade your plan