AM: Are we finding a bottom?

AM Update

MARKET BEHAVIOR
Stocks continue hanging around the 50dma as the widely expected Taper selloff is MIA.  We are less than 3% from all-time highs and the market is holding together quite well.   Typical selloffs are swift, while rallies grind higher.  Seven-trading days near the 50dma is more grind-like than swift-like, suggesting the market is finding a temporary bottom following earlier weakness.   We are in the tail end of the summer trading season and  will likely see more directional moves this fall.

MARKET SENTIMENT
While many are obsessing over the Taper, that chatter is self-defeating and minimizes the impact of the Taper.  The more the market talks about something, the fewer people there are that remain undecided.  Right now traders are falling into one of two camps, those that fear the taper and those that don’t care about it.  Those that fear it ran for cover early in the summer and are already in cash.  Those that are not worried about it don’t respond to Taper headlines.  With so few people undecided about the taper, it no longer matters.

Ignoring what the crowd fears is a common theme for this blog, but  it is one of the most difficult concepts of contrarian investing to have faith in.  Humans by nature are pack animals and long ago natural selection wired us to be in tune and empathetic with the people around us.  When everyone else was running scared, the best reaction was to run for our lives too.  Anyone who stuck around to see what all the fuss was about quickly became lion food.  But what worked in the wild 50,000 years ago will bleed us dry in modern financial markets.  Stand apart from the crowd and exploit their heard mentality.  Buy what they are selling and sell what they are buying.

TRADING OPPORTUNITIES
Expected Outcome:
While we have not decisively broken through the 50dma, today’s support is constructive.  Bears had fear and anxiety on their side, but were not able to do much with it.  We have multiple 5% pullbacks every year and so far that is how this weakness is behaving.  Every 5% pullback feels like the next big selloff when we are in the middle of it, but that is why they work.  They shake free weak holders, clearing the way for the continuation higher.  The hardest trade is usually the right trade and holding this weakness in the face of imminent Taper is not an easy thing to do.

Alternate Outcome:
The market typically overreacts on both the up and downside.  We go higher than we should and sell off further than is reasonable.  This is the herd mentality taking control of otherwise rational people.  All it takes is one catalyst to send already nervous traders running for cover and we always need to be careful.  While the recent weakness chased off a lot of nervous holders, it is really easy to turn confident owners into nervous sellers when prices start declining.

Trading Plan:
While the summer chop might continue, it seems like the recent selloff is finding a bottom and bears can use this pause to unwind shorts instead of waiting until the pain of a strong move higher chases them out.  If a bear insists on staying short, keep it on a tight leash and use a trailing stop to protect recent profits.  A bull can buy the break above the 200dma and use recent lows as stops.  If the selloff fails to materialize, look for the market to reclaim 1700 in coming weeks.

INDIVIDUAL STOCKS
MSFT exploded higher on news of Balmer’s departure.  While it is a bit overdone, this might be the emotional catalyst the stock needs to become popular again.  As any regular reader of this blog knows, I think MSFT is on the right track by building full-power tablets instead of limiting users with neutered, mobile-centric operating systems like iOS and Android.  The biggest risk for MSFT is appointing a new CEO that tries to turn the company into an AAPL clone by focusing on low capability devices.  Hopefully the next leader will play to it’s strengths as the only real choice for anyone doing real work.  In the very near future people will no longer own both a tablet and computer.  Their tablet will be their computer and only one company has the universal platform to offer nearly 100% compatibility with the programs they need for work and school.  99 cent apps are great for games and todo lists, but real work requires real software.  Forget iOS and Android, those are so 2012.  The future is full-powered mobile devices that plug into desktop docking stations.  Why choose between taking your tablet or laptop when you can take both in a single device?  That is the future and hopefully MSFT’s new CEO sees that vision.  No matter what the street thinks, MSFT is positioned perfectly for Mobile Revolution 2.0.

Plan your trade; trade your plan