AM: How did we get here?

AM Update

MARKET BEHAVIOR
Stocks coast higher and are within a few points of 1700.

MARKET SENTIMENT
The market is up 16 of the last 19 sessions as it defies all reason and logic.  Is it irrational?  Optimistically naive?  Or simply responding the only way possible given how traders are positioned?

Doubting this rally is the most crowded trade of the year, yet here we stand, 250-points higher and setting all-time highs.  Contrary to popular opinion, fundamentals and technicals don’t move markets, only buying and selling does that.  When too many people share the same outlook, they skew the market.  Traders doubting a move sell, some even go short.  This selling naturally purges cynics and replaces them with believers.  Believers who are willing to hold in the face of weakness and uncertainty.  That resolve keeps supply tight and leaves little room for the market to do anything but go but higher.  To this point patience and faith has been rewarded while those trying to outsmart the market footed the bill.

This rally soundly defeated every worry and concern cynics threw at it.  When is the last time anyone heard Fiscal Cliff, Sequester, or Cyprus?  Even Tapering is already falling off the front page. Ignoring what everyone is obsessing over is the single most difficult part of contrarian investing, but that has been the only trade to make this year.  If markets climb a wall of worry, we need something to worry about to keep propelling this rally.  The only thing I see is stubborn bears clinging to their negative outlook and this will likely let this market coast a bit higher.  After that, there is little worry left since the market already conquered everything else.  If fear fuels rallies, we need to be concerned if the tank is getting low and is something to keep an eye on.

TRADING OPPORTUNITIES
Expected Outcome:
The wind remains at the market’s back as it overcomes people’s fear of heights, but we are approaching the end of this move.  I have no idea if we will coast up to 1750 or higher in coming weeks, but it feels like the market is setting up for a Fall correction.  Nimble traders can stay long with trailing stops, but don’t get lulled into complacency by the benign headlines.

Alternate Outcome:
The most defiant rally in recent memory keeps going.  As investors sour on bonds and foreign equities, those fund flows can continue propping up US equities for months, even years to come.

Trading Plan:
Stay long this market with a trailing stop under 1680.  While of no technical significance, traders think in round numbers and 1700 is a major psychological milestone.  It could act as resistance, but look for a pop once we break through due to short-covering and breakout buying.

This market could be setting up a double-top, but let the momentum carry it a bit higher before attempting a short.  The top will only come after people stop talking about it.  Watch the headlines for the next big fear that is not priced in and be ready to ride that wave lower.  Don’t jump the gun and be prepared to wait a couple of months for the right opportunity.

And as always, after a nice run like, there is nothing wrong with taking profits and waiting for the next high-probability trade.

INDIVIDUAL STOCKS
Everyone is piling on the hate for MSFT and they deserve it after a lousy quarter, but it is foolish to assume tablets will replace computers.  We don’t need to look any further than our own driveways to see the logic people use when making purchases.  I’m making up numbers here, but something like 95% of all car trips are with a single occupant, yet  most cars have four seats.  What’s up with that?  One-seat cars would be faster, more fuel-efficient, better for the environment, and significantly less expensive.   How come no one buys them?  We don’t buy things that work most of the time, but ones that fit all our needs.  We buy cars for the  handful of trips a where we need all the seats and the same will happen with PCs and tablets.

Tablets are great, but can they replace computers?  Certainly not in their current incarnation where the most useful applications are nothing more than simple calendars and to-do lists.  People love their tablets, but I have yet to meet anyone who gave away their computer and moved exclusively to a tablet.  Tablets are an add-on, not a replacement to the utility of a PC.  In fact, I think Windows is the biggest threat to GOOG‘s Android and AAPL‘s iOS.  These are mobile operating systems designed specifically for low-power tablets, but in the very near future we will have full-power tablets capable of running Windows well.  When most of the cost of a tablet is in the screen, case, and battery, stepping up to a full power processor will be a minor upgrade and a far simpler solution than the PC/tablet combo people currently use.  Give me the portability of a tablet and the power of a desktop, I’m sold.  In a world where tablets are PC’s, is anyone going to buy GOOG’s and AAPL’s one seat-car when they could step up to MSFT’s four-seat model that covers all their needs?  Looking forward five-years, most likely our phone will be our primary computer.  Tablets and desktops will simply be docking stations for our full-powered phones.  In a world of no compromises, MSFT is still the king of productivity and dedicated mobile operating systems will soon be as obsolete as the 8-track.

The key to making money in the markets is seeing what comes next.  If we want to trade the future, who is best positioned to exploit full-powered tablets?  While the Surface is rough around the edges, that is clearly the direction tablets are going.

Plan your trade; trade your plan