AM: Forget the Taper

S&P500 daily at 3:15 EDT

AM Update

MARKET BEHAVIOR
Stocks dipped at the open on stronger than expected GDP numbers, but recovered into the green within minutes.  We cleared the minor speed-bump at 1640 and the next meaningful hurdle is the 50dma at 1660.  The summer chop continues, but Labor Day next week marks the start of the Fall trading season and we should expect more involvement from big money.  Their deeper pockets move markets and will finally take us out of this 1600/1700 trading range.  The million dollar question is if they will they buy the late summer dip or sell the weakness?

MARKET SENTIMENT
The knee-jerk reaction from many traders was selling the stronger than expected GDP numbers because they are still trying to trade the Taper.  Months ago we lived in the bizarro world where strong economic numbers were bearish because it threatened easy money.  Unfortunately for anyone trading in the rear view mirror, the Taper trade is already old news.  We beat that poor horse to death this summer and the market is already on to something else.  Right now that is fretting over Syria and welcoming the slow, but steady economic progress.

People have a hard time believing the Taper trade is already dead because it hasn’t even happened yet.  How can we safely ignore something that is still in front of us?  Easy, the market is forward-looking and people trade their expectations of the future.  I have yet to find a single person who thinks the Fed will continue buying $85 billion per month in debt all the way through 2014.  That means most everyone expects the Fed to Taper some time over the next 15-months.  In fact many are convinced it will happen sooner with most of the debate focused on September or January.  People trade what they expect and the market expects Taper, so that means it is already priced in.

No doubt there is some uncertainty surrounding Taper and the market hates uncertainty, but paradoxically that is a reason to buy the Taper weakness, not sell it.  When the Fed starts tapering in a moderate and responsible fashion, it will remove a big piece of uncertainty.  Since the eventual Taper will be less bad than feared, the market rallies on the news.  Sell the rumor, buy the news.  Rallying on the start of Tapering only seems irrational to those who don’t understand how the market works.

Syria is a whole different can of worms and we should expect more near-term volatility as the political posturing ramps up, but  this will be ancient history soon enough and we should buy when the missiles start flying.

TRADING OPPORTUNITIES
Expected Outcome:
The market is finally firming up after digesting the Syrian headlines.  Some hecklers want to give me a hard time because I remain constructive on this market while we sold off for a few days.  I’m not sure what these people expect, but no one has a crystal ball and I never claimed the ability to perfectly time every daily move in the market.  Many of these critics fail to realize successful trading is more about being wrong than right.  It is easy to make money in the markets, just ask any monkey with darts.  The harder part is keeping those profits.  That is where discipline, risk management, and stop-losses save the day.  Anyone can be lucky, but only the people who know how to be wrong will survive this game.

But back to the markets, the runaway selloff really didn’t get started.  While we slipped 5% from all time highs, the Tapering and Syrian fears cleared a lot of weak holders and brought in a new crop of owners willing to sit through this turmoil.  The market is fragile here and traders remain on edge, but sharp selloffs are swift and this one never really got going, meaning we are not standing on a trapdoor.

Alternate Outcome:
We are on shaky ground.  That means one of two things, either this is a great buying opportunity, or the floor is about to fall out from under us.  Major declines always start as small selloffs and we must always take weakness seriously.  While we don’t need to run from it, we should respect it and that means watching for signs of dip-buying drying up.  Every dip this year has been buyable, but eventually we will run into one that is not.  We made a lot of nice profits this year, it would be a shame to let those evaporate as we stubbornly hold through the top of this rally.

Trading Plan:
Bears and shorts need to tread lightly.  They’ve been right the last couple weeks, but the goal of this game isn’t to be right, it is making money and the only way to do that is selling our winners.  Selloffs are typically swift and this one is proving quite stubborn, meaning recent weakness is unable to shake many confident holders loose.  Of course the one time selloffs grind lower is bear markets.  While that is possible, it seems premature, especially given historically strong earnings and better than expected economic growth.  Our next bear market is coming, but we need people to forget about the last one first.

As for bulls, the market will likely remain choppy through next week as we wait for Syria to be resolved and bigger trader to come back from the holiday.  While I remain optimistic, forcing a trade here is a good way to get chopped up in these swings.

Plan your trade; Trade your plan