AM: Selling stalls

AM Update

MARKET BEHAVIOR
Stocks bounced between 1690 and 1700 as the indecision continues.  While we haven’t recovered 1700, today’s strength looks to end the streak of down-days.

MARKET SENTIMENT
The recent dip opened the door to further selling, but the market didn’t take the bait.  Even with all the QE fear mongering, the best bears could manage so far is a trivial 1.5% slip from all-time highs.  For context, the previous two QE initiated selloffs started with intraday plunges of 2% and 1.4%.  Clearly the last three-day “selloff” was nothing like May 22nd’s and June 19th’s breakdowns and the resulting trade will also look different.  We trade the market, not our biases, and so far the uptrend is holding up nicely.

QE driven selling in May, June, and over the last three-days flushed out most traders afraid of an impending Tapering correction.  It is foolish to expect a major market selloff, yet continue holding stocks, so common sense tells us most Tapering worrywarts are long gone. This proactive trading phenomena gives the market its forward-looking behavior.  Back to QE, at this point even the baristas at Starbucks know tapering is just around the corner, so there is no QE trade other than ignoring all the hype.  Forget QE and move on to the next thing.

Without a doubt ignoring what everyone is talking about is one of the hardest parts of contrarian trading.  (The other is not confusing trend with sentiment.)  When we break it down and look at it rationally, it is fairly obvious everyone predicting doom and gloom is already out of the market.  When most are expecting the worst, the bulk of the selling is already behind us and without new supply, markets often rally.  This single idea drove us from November’s 1340 lows and continues pushing us higher as long as the cynics keep fighting this rally.

TRADING OPPORTUNITIES
Expected Outcome:
If this market was going to break wide open, it would have happened by now.  Today’s support is constructive and suggests we are not done making new highs.  The previous three days of selling was all on recycled headlines and was only temporary.  This rally will end at some point, but it will be on new and unexpected developments, not the stuff everyone is already talking about.

Alternate Outcome:
Markets top for one of two reasons, bad news or good news.  The bad news is fairly obvious so I won’t get into it, but good news selloffs lead to longer and deeper corrections.  Good news selloffs happen when everyone is bullish and fully invested.  At that point there is no one left to buy and nowhere to go but down.    We could see either of these bearish outcomes in the near future and need to keep an eye on both.  The first and most obvious sign the market is breaking down is seeing it fail to hold previous support.  We can continue buying dips, but we must always respect our stops.

Trading Plan:
The modest selloff and recent strength doesn’t support the bear case.  It is better to get out early when losses are small, then push our luck and wait for the pain of mounting losses to force us out.  If a bigger selloff is in front of us, there is plenty of time to jump on that bandwagon when it finally shows up.

Bulls can buy/continue holding a break of 1700.  The recent low of 1685 makes a decent stop.

INDIVIDUAL STOCKS
TSLA is holding post earnings gains nicely, but every sustainable rally needs basing and consolidation.  Without that foundation and pruning of irrational exuberance, the stock is setting up for a bubble style of collapse.  To remain sustainable, the stock needs to check back to the 50dma at some point in coming months.  Maybe we trade sideways until it catches up, or we dip down to it.  I hope it does one of those two because the alternative is a bubble style collapse to $50 over a period of weeks.  That isn’t bad if we get out early, but that is easier said than done.  Just ask anyone who owned AAPL at $700.

Speaking of AAPL, the stock is on track for its third down-day following a brush with the 200dma.  This is a nice place to take profits and maybe that is all this weakness is, but we could also be slipping as few large investors are willing to chase the stock up to recent highs.  Its been a nice run and the only trade on AAPL this year has been buying weakness and selling strength.  Since this is the highest we’ve been since January, this might be a good time to lock in profits.

Plan your trade; trade your plan