AM: More of the same

AM Update

MARKET BEHAVIOR
More of the same as the market remains stuck between 1680 and 1700.  Aside from a couple short excursions, the market traded between these levels for the last month.  Traditionally the longer a market consolidates, the bigger the resulting move.  Every sideways consolidation this year ended in an upside breakout and when it doubt, stick with the trend.

MARKET SENTIMENT
We are in the final weeks of summer and shouldn’t expect much.  The big decision makers are returning from summer vacation and just getting settled.  Look for larger moves in September and October as big money takes their portfolios off autopilot and starts buying and selling in larger quantities.

Consolidations typically favor a continuation and most reversals end in an exhaustion surge.  Traders are notoriously afraid of heights and more comfortable buying dips than breakouts.  That’s why many distrusts the market at all-time highs, yet love AAPL under $500.  The thing we need to remember is people already traded what they talk about.  If someone loves AAPL, they are fully invested.  If they claim this market’s gone too far, they already moved to cash.  The ideas people talk about and promote tells us how they are positioned.  If the chorus claims the market is ready to top, it means the crowd already sold.  If everyone says AAPL is going higher, they already own as much as they can hold.  The reason contrarian investing works so well is markets only respond to changes in supply and demand and people only trade when they change their mind.  If the crowd loves something, there are few left to buy and a large group of potential sellers.  If the crowd dislikes something, there are few left to sell and plenty of buyers available.  This is one of the best years in market history because no one trusted it and AAPL slumped 40% because everyone loved it.  Go against the crowd, not the trend.

TRADING OPPORTUNITIES
Expected Outcome:
These things go longer and further than anyone expects and that is clearly the case here.  No matter how high this feels, there is still more upside left.  Markets decline faster than they rally.  Holding 1680 for a month is the opposite of a swift selloff and suggest the high probability trade remains higher.

Alternate Outcome:
Hundreds of millions of shares changed hands over the last month.  Many new buyers are using 1680 as support and will sell a dip under this level.  Once the selling starts, it has a tendency to cascade as more stops are hit and the wider pool of owners become nervous.  Selling begets selling and before we know it we find ourselves down fifty points.  While I don’t expect that, hard stops keep us out of trouble.

Trading Plan:
It is hard to make money in this lethargic, sideways market and the risk/reward is not on our side.  Waiting for the resolution of this consolidation will provide quicker and safer profits.  A sustained break of 1700 is our signal to go long and failing to hold 1680 is our chance to short the market.  Expect the real fireworks in September and October as we either continue this rally into year-end, or finally start the correction everyone’s been waiting for.

INDIVIDUAL STOCKS
It really felt like the overly bullish fever in AAPL broke.  It was no longer the overwhelmingly most talked about stock on StockTwits and I largely stopped getting hate mail every time I criticized the company.  No doubt that shift in sentiment allowed for this $100 move higher, but how much upside is left?  There was a revealing, if not downright scary poll on Yahoo Finance today.  Well over 50% of the respondents are not simply bullish on AAPL, but they said they are willing to “bet the farm” it will recover old highs.  It is shocking how excited people are about a stock that is 30% off its 52-week high.  The bullish arrogance is also back in the StockTwits AAPL stream.  No doubt these people have a lot of be excited about, but I wonder what level most of these people bought?  Rather than making a lot of money, I suspect many are excited about losing less.

While there is a lot of upside momentum, for the company to truly make a comeback we need to see a return to strong growth and a decisive reversal of the nonstop market share losses.  It’s been a great trade for those that bought the breakout following earnings, but we only make money when we sell our winners.  Every AAPL bull needs to have their price that is good enough.  Many rode this down from $700 and hopefully they learned their lesson about using trailing stops.

Plan your trade; trade your plan