AM: Stability means what?

S&P500 daily at 3:15 EDT

AM Update

MARKET BEHAVIOR
Stocks eked out minor gains and added some cushion above the 50dma.  Neither bulls, nor bears have been able to move the needle in the final weeks of summer as we continue hovering indecisively around this widely followed moving average.

MARKET SENTIMENT
The widely expected Tapering collapse is still MIA.  In the bear’s defense, markets never move in straight lines so this could simply be a sucker’s bounce, but swift selloffs typically take our breath away before pausing and 4% is hardly breathtaking.

Everyone knows Tapering is coming and it really doesn’t matter much if it starts in September or January.  The Fed is ultra sensitive to the markets and it is highly likely tapering will start nominally to give markets plenty of time to adjust to a new reality.  Everyone, including the Fed, knows what would happen if they abruptly shut down the program and it is unnecessary given stable inflation and anemic growth.

If Tapering is already priced in, we need to keep an eye out for what comes next.  Remember, markets only move when people change their minds.  That means we are looking for new revelations that shows things are better or worse than most expect.  Disappointing earnings out of bellwethers like WMT, M, and CSCO could be the cracks in this already weak economy.  Or all this money fleeing bonds could bid up stock prices.  If these things were easy to figure out, everyone would be rich.

For all those worried about “War” in the Middle East, that is quickly becoming one of those Chicken Little things.  Afghanistan, Iraq, Iran, Egypt, Libya, Syria, etc.  Last year’s “Arab Spring” didn’t crush the market last year and is unlikely to do it this year.  Everyone’s long gotten used to $4 gas and it really isn’t a big deal anymore.  Outside of a revolution in Saudi Arabia, it’s business as usual.

TRADING OPPORTUNITIES
Expected Outcome:
No one knows what comes next and the best we can do is trade probabilities.  Violating the 50dma was the perfect invitation for sellers to rush for the exit and the market to collapse.  But that didn’t happen and we found a floor instead.  At the very least it tells us holders remain confident in the face of modest weakness.  Traders often focus on demand, but we mustn’t forget about supply.  No matter how dire things look, it is easy to prop up prices when supply remains tight (ie no one is selling).

When in doubt, stick with the trend, especially when the market is afraid of headlines; Tapering, Syria, weak retail results, etc.  A skittish market is an underweight market.  An underweight market is a buyer’s market.

Alternate Outcome:
Buying the dip is the most tired trade of the year.  While it worked every other time, there will come a day when all these cocky dip buyers give back a year of profits in one swift selloff.  While the odds always favor a continuation (markets continue countless times but only reverse once), we must always play defense.  Trading above the 50dma should have triggered a short squeeze, but we only saw modest gains over the last couple days.  We must always tread lightly when the market doesn’t do what we expect.

Trading Plan:
While the sideways trade continues, stability favors an upside resolution.  Bears need to be careful with recent profits and not let the market take those away.  Adventurous Bulls can own here, but keep stops tight.  This sideways trade will likely continue frustrating both sides as the market’s indecisiveness lasts into early fall.  The best trade is waiting for the next trade.  In coming weeks the market will let us know what it wants to do and we simply jump on board.

AAPL daily at 3:16 EDT

INDIVIDUAL STOCKS
AAPL continues hanging on to $500 days before it’s widely anticipated product launch.  We already know about iOS7 and people are fairly certain about the iPhone5s and the iPhone5c.  Those should be well received even if they are not all that innovative, but the one thing many investors overlook is just how dependent AAPL is on corporate charity from ATT and V.  Many iPhone users upgrade every two-years like clockwork, taking advantage of the $400 phone company subsidy.  Years ago AAPL was in control and could dictate terms to ATT and V as high-value customers lined up to buy iPhones, but the tides have turned as Android is the most popular flavor of smartphone domestically.  This is doubly good news for ATT and V.  First, Android phones are much cheaper and require less subsidy.  Second, they are less dependent on the iPhone and we could very well see a decrease in that all important subsidy.  Even a modest bump from $200 to $300 will put a significant dent in the number of iPhone customers opting for an upgrade.  Innovation or not, the day the phone companies reel in their subsidies will be a very bad day for AAPL shareholders.  I have zero knowledge of anything like this happening, but it is one of the biggest risks facing AAPL shares.

Plan your trade; Trade your plan