AM: Economy continues exceeding expectations

AM Update

MARKET BEHAVIOR
Stocks are modestly higher on stronger than expected employment, but still running into overhead resistance at the 50dma, currently around 1625.

MARKET SENTIMENT
Is good news still bad?  Some are making the argument strong employment threatens QE, but so far the market doesn’t appear concerned.  The selloff from May’s highs and last month’s Fed meeting plunge flushed out anyone afraid of Tapering.  Opportunistic traders buying the dip are obviously less concerned about weakness and impending Fed action.  Fewer worrywarts and more confident holders finally means good news is good again.

One of the more interesting developments is the surge in 10-year Treasury rates.  They are up a staggering 1%  in less than two months even as the Fed continues buying $85 billion in bonds.  Two-months ago the mantra was don’t fight the Fed, but this market is oblivious to the Fed’s buying and rates are surging on expectations of the Fed’s eventual exit.  The important takeaway is the Fed does not control the bond market.  I used this analogy before, but the Fed is like a four-year old girl walking the large family dog.  Everything works great as long as the dog is agreeable and listening to the little girl, but this is perceived control, not actual control.  The dog can easily overpower the girl if he spots a rabbit and there is nothing she can do to stop him.  This is exactly what is happening in the bond market.  While the Fed’s $85 billion in monthly purchases are impressive, they are a drop in the bucket of the ginormous bond market and we are seeing just how small the Fed really is when the bond market decided it didn’t want to play along any more.

While many see this as a bad thing, I’ll take the other side.  It shows low-interest rates were not driven by the Fed, but came from an agreeable market willing to accept historically low yields.  The only reason the Fed appeared successful is the market wanted to go where the Fed was trying to take it.  While we have some emotional selling in the bond market as traders fear QE being taken away, the reality won’t be nearly as bad as many predict simply because the Fed was never in control of the bond market in the first place.  Bonds were expensive because that is where the market wanted them and once this Tapering fear-trade passes, rates will come down again, even without the Fed’s buying.  The bond market is setting up a sell the Tapering rumor, buy the Tapering news trade.  While we should expect more near term volatility in the bond market, the eventual start of Tapering is a buying opportunity, not a selling one.

TRADING OPPORTUNITIES
Expected Outcome:
The market remains stable following the recent selloff.  The wave of emotional, panic driven selling is behind us and we held 1600 for most of the last month.  Selloffs are swift and this sideways trade is supportive of the market, making a continued selloff less likely.  The recent dip chased out most potential sellers and we bounced on the resulting tight supply, but arresting the fall doesn’t automatically mean good times are here again.  Traders spooked by recent volatility are reluctant to buy back in.  While supply is tight, demand remains weak and we continue trading sideways.  The best way to trade the summer chop is to buy weakness and sell strength.  Take profits early and often because they will evaporate days later.

Alternate Outcome:
While the market largely digested Tapering, there are countless other landmines out there to be wary of.  We can safely ignore what everyone is talking about, we need to fear the stuff no one is talking about.  I have no idea what they might be, but a simple stop-loss will keep us out of trouble no matter what happens.

Trading Plan:
We remain between 1600 and the 50dma, but are at the upper end of the recent range.  A swing trader can proactively lock in profits and buy back in if we break overhead resistance.  A bull can continue holding with a stop above 1600 and a bear can short stalling at the 50dma with a stop above the moving average.  No matter what our outlook, expect the chop to continue and take profits early and often.

INDIVIDUAL STOCKS
AAPL is not enjoying the market’s strength and the recent rebound is stalling today.  A return to $400 likely means the stock has more downside left and it really acts like it is destined to test $35o in the near future, especially if the iPhone5s lacks the must have features to induce iPhone4s owners to plunk down the $200 or $300 upgrade fee.  Some phone companies are letting people upgrade if they trade in their old phone, but those used phones are resold and will cannibalize lower end AAPL sales.

GLD remains unpopular as it gives back the recent bounce on strong employment.  Protection against economic meltdowns and out of control inflation is falling out of favor and ironically gold is one of the least safe places for people to hide out in this gradually improving economy.

Plan your trade; trade your plan