PM: Happy Birthday America!!!

S&P500 daily at end of day

AM Update

MARKET BEHAVIOR
Stocks were quiet leading into the holiday and Friday’s employment numbers.  We remain between 1600 support and 50dma resistance.  Since market selloffs tend to be quick, the longer we hold these levels, the more supportive it is for a continuation of the uptrend.

MARKET SENTIMENT
Restrained trade ahead of a holiday is normal and expected, but there is the potential of a market moving employment report on Friday.  The financial press hypes it up, but ever since the market transitioned from job losses to job gains a couple of years ago, its been less of an event.  But in a conditioned Pavlovian response, people still get anxious in the days leading up to it.

Today’s Yahoo Finance poll shows two-thirds of respondents expect employment to fall short of expectations, with almost a majority expecting a major miss.  The least expected outcome is a major beat, with only one out of eighth bullish on the economy.  What traders expect has little to do with the actual number, but it does directly affect how the market responds.

In a normal world, stronger than expected employment boosts the market, and vice versa.  But in this bizarro world of QE, the market’s reaction is far less intuitive.  If traders are more concerned about the continuation of QE than the strength of the economy, then good is bad and bad is good.  At least that is how the talking heads have spun it, but even more simply, the market rallied regardless of the employment number as we are up nearly 300-points since the November lows.  Rather than say employment is this or that, it is easier and more accurate to say employment has been a non-issue for this market.

Source: Yahoo Finance 7/3/2013

While the employment report’s influence has been diminished in recent years, the market’s lowball expectation is still insightful in understanding sentiment.  Traders remain bearish on the economy and this negative outlook affects their positioning.  As over-bullish as people claim this market is, everything I see shows people still don’t trust it.  If the market expects the worst, then people remain underweight and the negative outlook is already price in.  As low as the bar is, look for the economy to continue exceeding expectations.  The contrarian trade isn’t going against the trend, it is going against the crowd.

TRADING OPPORTUNITY
Expected Outcome:
While a market crash is off the table, expect the summer chop to continue.  There are two ways to trade sideways markets, 1) buy weakness and sell strength or  2) take some time off and wait for the next directional move.  Making money in the market is easy, the hard part is keeping it.  These volatile periods are where most traders give back months of gains as they react impulsively to the market’s head-fakes.  Trade this market proactively or don’t trade at all.  Take profits early and often because they will evaporate days later.

Alternate Outcome:
At some point the market will break out of this range.  Maybe it will be a continuation higher, or potentially the selloff continues.  For the time being, expect the market to remain range bound, but keep watching for the next directional move and be ready to grab on.

Trading Plan:
Not much is going on between 1600 and the 50dma.  If a bull or bear has strong conviction, they can own with a stop under 1600 or short with a stop above the 50dma.  The agnostic swing trader should lock in recent gains and wait for the next trade to develop, either trading above the 50dma or falling under 1600.

Expect some volatility immediately following the employment report, but often the initial knee-jerk reaction is wrong and wait to see how the trade develops in the afternoon to get a true sense of what the market thinks.

Trade your plan; plan your trade