PM: Sell the hype?

S&P500 daily at end of day

PM Update

MARKET BEHAVIOR
Stocks sold off on average volume and finished under 1630 following the Fed’s policy statement and Bernanke’s comments.

MARKET SENTIMENT
The Fed shocked everyone when it announced it would eventually unwind QE.  Okay, all sarcasm aside, the market was disappointed Ben didn’t do more to appease it by promising easy money as far as the eye could see.  The funny thing is many of the people who last year claimed another round of QE wouldn’t work because of diminishing returns and inflation are the same ones saying this market will implode as soon as the QE punch bowl is taken away.  Last year QE didn’t matter, now it is the only thing that matters.  Once a pessimist, always a pessimist.

As we discussed earlier, this gradual ramp of expectations into the inevitable tapering is good for market stability   All the talk of QE ending is already pricing it in and the actual event will be a non-issue, but that is then and this is now.  What should we expect in coming days and weeks?  Is the bubble finally deflating, or is this just another bump in the road?

Average volume showed not many were rushing for the exits.  Markets only move when people change their minds and trade their new outlook. If we expect a directional move here, we need to identify who is changing their mind.  Was the Fed’s policy statement and Bernanke’s comments so out of line from expectations that a large wave of traders are changing from bullish to bearish, or bearish to bullish?  That is a hard argument to make since the Fed’s statement was nearly a word-for-word carbon copy of past statements.  The only notable change is positive comments about the economy.   Talk about a bizarro world we live in when traders are afraid of good economic news.

If bulls and bears are not changing their minds on these headlines, today’s selloff was simply event traders pushing around the market.  Without follow-on selling from a larger pool of holders, look for the selloff to stall and bounce back into the trading range.

TRADING OPPORTUNITIES
Expected Outcome:
Volatility was expected and pulling back after recent gains shouldn’t surprise anyone.  We anticipated a summer trading range and so far this market is following the plan.  Look for it to bounce somewhere between here and support at 1600.  The more anxious the crowd gets over the selloff, the quicker it will end.

Alternate Outcome:
While a bounce seems likely since this news changes few minds, we must be prepared for the inevitable selloff.  At some point we will run out of buyers and without demand, nothing else matters.

Trading Plan:
We might see further downside, but look to buy the weakness with a tight stop under support.  We could temporarily dip under the 50dma and the rebound back above it is the buy signal.  Anyone short this market should cover and lock in gains.  Profits are fleeting for both bulls and bears in this sideways chop, so take them early and often before they evaporate.

AAPL daily at end of day

INDIVIDUAL STOCKS
AAPL broke recent support and anyone trading the bounce off the 50dma should be long gone by now.  The inability to stage a comeback after holding the 50dma for nearly two-months shows few are interested in buying the dip.  Further weakness will likely trigger more stop-loss selling and a test of support at $400 is the next stop.

GLD tanked on hints of the end of easy money.  Runaway inflation is a core tenet of the gold-bug’s investment thesis.  Without monetary instability  there are few reasons to own a useless metal brick.  Violating recent lows could trigger another wave of selling, but if the market fails to collapse after making new lows, it shows we are running out of sellers and the dip is buyable.  In this case, let the price action be our guide.

Plan your trade; trade your plan