AM: Bears get whacked again

S&P500 daily at 3:26 EDT

AM Update

MARKET BEHAVIOR
Stocks sunk in early trade, but bounced off support at 1680 and turned green by mid-afternoon.

MARKET SENTIMENT
Bears have been in control as we declined in five of the last six sessions, but the best they could muster was a 1.3% “selloff” from all-time highs.  Even with the wind at their back they still couldn’t shake confident holders and this Teflon rally continues levitating on tight supply.

Recent weakness emboldened bears, convincing them this was finally their moment, but today’s bounce shows they are early yet again.  This market will suffer a material decline at some point, there is no disputing that, but early is the same thing as wrong and many bears have been wrong for eight months and counting.  They will be right at some point, but because of the dynamics in the markets, it won’t happen until the crowd gives up on calling a top.

This has been one of the best and easiest years in market history, yet people still don’t trust it.  This is the very reason we keep going higher.  Many blame our strength on irrational exuberance, but it is in fact a product of the exact opposite, irrational pessimism keeps this rally alive.  Most traders were battered and scarred by the damage in 2008 and early 2009 and like anyone suffering from PTSD (post-traumatic stress disorder), they keep reliving those events in their mind and normal and ordinary events trigger acute flashbacks.   How this supports the rally is it keeps the worrywarts with an itchy trigger finger on the sidelines.  Without skittish traders, there are few in the markets to trigger a stampede rush for the exits.  Without that exaggerated volatility, the market rallies nicely on a steadily improving economy.

TRADING OPPORTUNITIES
Expected Outcome:
Today’s bounce off the lows has all the hallmarks of a short-squeeze.    The one-way rebound is driven by the pain of shorts forced to cover as the market relentlessly moves against them.  We’ve been talking all summer about taking profits early and often because this market will take them away days later.  Rather than collect profits, many bears turned greedy and are getting forced out for a loss today.  But they are not the only ones.  Bulls who held on too long were recently squeezed out in recent weakness.  Choppy markets favor the nimble and that’s been the best call this summer.

Alternate Outcome:
Keep watching 1680.  The sideways churn brought in a lot of new owners with a stop under this obvious technical level.  Break that and we will see a wave of selling, possibly triggering a follow-up cascade of emotional selling.  The next widely followed level is the 50dma and is where we are headed if we cannot hold 1680.

Trading Plan:
The bears just cannot get the job done and this gives the edge to bulls.  Expect short covering to push us through 1700, but be mindful of slipping under 1680.  After spending a few weeks inside this tight range, be prepared for a strong move either way.

INDIVIDUAL STOCKS
AAPL is on fire between breaking the 200dma, the impending product event, and most recently Carl Icahn announcing a large stake on Twitter.  Those sent shorts running for cover, but this strength looks like a better selling opportunity than buying one.

Apple has great products if we still lived in 2010, the last year AAPL really surprised anyone with real innovation, the Retina Display in the iPhone4.  No one uses Siri, iMaps was a disaster, the iPad Mini was simply playing catch up to Android, and iTV’s been a dud since it came out in 2006.  If you go to Best Buy, the Apple table is the most boring section of computer/phone department.    Surprisingly enough, the most interesting products are all Windows computers, laptops, and tablets.  While a 20″ all-in-one Windows desktop is boring enough, they go and make the monitor into a giant, removable tablet with its own battery!  That’s far cooler than anything we’ve seen out of AAPL recently.  Even the laptop/tablet hybrids are getting innovative and exciting.

AAPL daily at 3:26 EDT

The last decade saw a relentless consolidation of digital devices.  Phones, PDAs, cameras, GPSs, and MP3 players have all been rolled into a single device, making many once dominant companies obsolete.  When is the last time anyone bought a Palm Pilot, iPod, GPS, or point and shoot camera?  What is the one stand-alone device left?  Our computer.  Soon we will no longer choose between taking our tablet or laptop computer because they are merging into a single device.  Unfortunately for GOOG, AAPL, and ARM, only MSFT and INTC are hard at work on the next generation of full powered devices.  As investors we need to look for the next big thing and the blending of computers and handheld devices is the next logical step.  Who wants a neutered mobile device with a mobile processor, mobile OS, and mobile apps when they can have a full powered computer in their hand that run anything and everything they need.  In five years our phones will be our computers as we plug them into docking stations on our desks or wirelessly connect them to a dumb-terminal tablets.  Invest in the companies downsizing full powered devices, not the ones entrenched in keeping the mobile market alive.

But that is the long-term view.  In the near term, AAPL might seem some strength in anticipation of their product launch, but this is more likely setting up a buy the rumor, sell the news trade.  We can hold the 200dma, but be prepared to sell strength because this is a relief rally, not a return to the glory days of market beating innovation and dominant market share.

As for the surge on Icahn’s announcement of his stake, that is simply one man’s opinion and has nothing to do with the larger fundamental story.  Look for this surge to reverse in coming days as the euphoria and herd buying wears off.

Plan your trade; trade your plan