Anatomy of a bounce

Intraday Update

MARKET BEHAVIOR
Stocks rebounded from yesterday’s 1,770 lows, shrugging off another overnight Asian bloodbath.  This is the fourth day the market held 1,770 and likely indicates, at least for the time being, the Emerging Market selloff is no longer a major worry for US markets.

MARKET SENTIMENT
With every headline, there are market participants who think it is a big deal and others that are indifferent.  Over the last week, those fearing developments in emerging markets sold, fearing this was the start of something bigger.  Those that bought from the sellers demonstrated a lack of fear of the same headlines.  Anyone holding the dip also showed a willingness to continue owning in the face of these risks.  Eventually we reach a point where everyone who is concerned is out and anyone left is indifferent.  That is the point where selloffs end.

Yesterday’s Fed Taper and last night’s Asian selloff was the perfect invitation for anyone worried about those events to sell.  The fact we didn’t selloff indicates there are few worrywarts left in and most holding stocks are comfortable owning these risks.  As long as those events maintain the same trajectory, we shouldn’t expect our markets to react since these expectation are now priced in.  Obviously if the situation deteriorates, it will trigger another round of selling, but most likely the worst is behind us.  Better yet, if the situation turns out less bad than feared, emotional sellers gave us another profit opportunity.  Their pain is our gain.

TRADING OPPORTUNITIES
Expected Outcome: Modestly Bullish – buy the dip
The Emerging Market selloff is taking a break and will likely turn into a near-term short-squeeze.  That doesn’t mean the coast is clear and we are coasting to 1,900.  Stay vigilant and look for the market to trade sideways in the 1,770 to 1,850 range for the remainder of the quarter.

Alternate Outcome:
There are still risks abound and this might be nothing more than a technical bounce if the Emerging Market situation flares up or January’s employment shows December’s disappointing numbers were not fluke.  If buying dips were easy, everyone would be rich.

Trading Plan:
Support is buyable for a swing trade.  When the market gets back to the 50dma, we will reevaluate sentiment to determine if this bounce is headed back to the upper end of the 1,850 trading range, or stall and tumble to new lows.

INDIVIDUAL STOCKS
AAPL slipped under $500 for the first time since October as dip buyers are still shying away from what bulls claiming is a fantastic buying opportunity.  Part of AAPL’s problem is everyone who loves the stock already owns it.  Those not already drunk on the Koolaid are wary of the slowing growth and want to see AAPL reinvent another product category before pushing the stock back toward old highs.  At this point is seems like the best outcome for shareholders AAPL becomes another MSFT and trades sideways for the next decade.  Worst case is it follows the same trajectory as the other hot handset makers, PALM and BBRY.

FB shattered expectations again.  The IPO darling, turned Wall Street joke, turned juggernaut, shows just how emotional traders are toward high-flying stocks.   NFLX is another darling, goat, back to darling story, except this is NFLX’s third trip through the rodeo.  Best advice is sell what everyone loves and buy what everyone hates or is afraid to own.

Plan your trade; trade your plan