A wild ride to nowhere

MARKET BEHAVIOR
A wild ride to nowhere.  Gap 10-points lower at the open, surge 15-points an hour later, collapse 20-points a few hours after that, only to reclaim another 15 just before the close.  If anyone is keeping track that, there was more than 60-points of up and down through the day, easily the wildest ride in quite some time.  But for all that amazing volatility, we finished down a trivial 2-points!

MARKET SENTIMENT
There was a little something for everyone in today’s trade.  For bears, tops are often volatile as the battle between bulls and bears heats up.  This is because previously dominant bulls start losing their grip on power and bears are finally able to put up a competitive fight.  Today’s back and forth certainly qualifies as a competitive fight.  For bulls, everything was clearly going the bears way when we slipped under 1,780, yet they couldn’t hold that ground as a wave of dip-buying bowled them over.

Markets often break down faster than they climb.  There are plenty of human and crowd psychology reasons for that, but what is important is bears had a golden opportunity to break this market wide open, but they just couldn’t get it done.  That clearly shows buyers are not rolling over here and they still have sufficient strength to defend these levels, at least for the time being.

While today’s rebound is impressive, it is hard to be bullish when everyone else is.  Investor Intelligence bullish readings are near 5-year highs (57.1%) and bearish levels are setting new 5-year lows (14.3%).  While these readings don’t give us definitive trading signals, they indicate an imbalance that will invariably swing back the other way at some point.  Maybe it won’t be tomorrow, next week, or next month, but it is coming and that makes it hard to get comfortable with these levels.

TRADING OPPORTUNITIES
Expected Outcome:
Markets decline for one of two reasons.  The more obvious is unexpected bad news causes investors to lower their expectations of the future and thus the price they are willing to pay for stocks.  The second is running out of new buyers because the crowd is extremely bullish and everyone who believes in the rally already owns all the stock they can hold.  While the first case leads to a terrifying and breathtaking plunge, the second scenario sneaks up on us as we slip lower without raising alarms.  Since current worries are few and far between, we can discount the imminent plunge and instead need to be watchful of the benign grind lower.  While it is clearly premature to be talking about a correction 1% from all-time highs, with so many bulls already in the market, it is hard to figure out who the next greater fool is.

Alternate Outcome:
When in doubt, stick with the trend.  So far we have seen little concrete data or technical behavior to suggest this market is running out of gas.  Even if we pullback for a few days, all that does is shake free weak owners who will soon be forced to chase this market as it continues higher without them.  Reclaiming 1,800 and setting new highs above 1,813 will go a long way to showing this rally still has legs.

Trading Plan:
The market is at a critical juncture.  Either we bounce or we don’t.  It is hard to be more clear than that.  Failing to reclaim 1,800 shows buyers are becoming scarce and a test of the 50dma is likely.  On the other side, another humiliating defeat of bears at 1,780 likely means we have new highs in the near future.  Trade each of these scenarios according to your outlook, but keep stops close incase the market doesn’t respond as expected.

INDIVIDUAL STOCKS
The WSJ is reporting AAPL finally landed China Mobile, something AAPL bulls have been eagerly waiting for.  Now that it is finally here, we get to see how much of this news is actually priced in the stock.  While we will no doubt see a strong reaction to the news, the more meaningful trade will occur after the initial excitement settles down.  Will the stock keep adding to those early gains, or is this a buy the rumor, sell the news event?  If we see a nice pop, it would be hard not to take profits off the table given how far the stock’s come in recent months.  This is not unexpected news, so it is unlikely it will cause a lot of investors to change their mind about the stock.  Those that were bullish before this news will remain bullish, and most bears are bears for reasons unrelated to China Mobile and equally unlikely to change their outlook.

Plan your trade; trade your plan