AM: More pain for bears

AM Update

MARKET BEHAVIOR
Stocks surged in morning trade, but leveled off near 1650 by midday.

MARKET SENTIMENT
Bears are flabbergasted by recent strength. All their analysis and insights say this market is overly-bullish, extended, and ready to breakdown, but they need to ask themselves why it is not acting like it should.  The biggest mistake these investors make is assuming the market will behave like everyone expects.

Markets are the greatest discounting mechanism ever conceived.  Anything widely known and expected is already priced in.  All of the traders predicting a market implosion sold out long ago.  When too many people predict doom and gloom, they take all that supply out of the market in a “sell the rumor” phenomena.  By the time the expected event rolls around, there is no selling left and the widely expected collapse never happens simply because everyone sold ahead of time.

Then comes the “buy the news” phase where the actual event is less bad than feared.  Once the event happens, all risk and uncertainty evaporate, add to this the tight supply because all the selling occurred earlier, and that is the perfect recipe for a bounce.  The market is far less irrational when we understand what really makes it move.

TRADING OPPORTUNITIES
Expected Outcome:
The recent bounce diffused any and all downside momentum.  Selloffs happen quickly and this market had every opportunity to crack wide open, but it held firm instead.  That shows there are few left to sell weakness and most holders are in this for the long-term in spite of near-term volatility.

Alternate Outcome:
Buying the dip is a tired trade and what becomes too obvious stops working.  While we might not be there yet, the day is coming when dip won’t bounce.  Failing to hold support will be our signal the market’s personality is changing.

Trading Plan:
We are now in the middle of the recent trading range.  If we climb to 1660, move our trailing stops up to 1650 to ensure we keep recent gains.  When the market moves up to 1670-1680, start thinking about locking in profits ahead of the dip back into the heart of the trading range.  At this point move stops up to our buy point and don’t allow this winning trade to turn into a loss.

INDIVIDUAL STOCKS
AAPL is stuck just under the 50dma and not enjoying the broad market’s strength.  Most still believe in the earnings power and brand equity in this name, meaning the stock is fully valued and those waiting for a return to the easy buy-and-hold days will be frustrated by the anemic trade.  Clearly this stock does not want to go higher, the only question is if it is done selling off.  I still think a dip to $350 is required to finally flush out the hopeful still hanging on.

Plan your trade; trade your plan