Down, but holding support

Intraday Update

MARKET BEHAVIOR
Stocks gapped lower at the open on renewed emerging market concerns, but are off those early lows in midday trade.  This morning’s dip failed to undercut Monday’s lows and continues trading sideways above support.  If we hold this level for a few more days, we might be establishing a wider 1,770 to 1,850 trading range that could last the remainder of the quarter.  Several months of sideways trade would go a long way toward refreshing this aging bull.

MARKET SENTIMENT
The headline everyone is waiting on is the Fed policy statement due at 2pm EST.  I’m not sure what people expect since the Taper policy was explicitly telegraphed last month.  Plan on another $10B taper and holding ultra low-interest rates.  If that catches anyone by surprise, they are clearly not paying attention.  If some are hoping a 3% “crash” in equities or monetary crises in small countries on the other side of the globe will force the Fed to change their carefully laid out plans, they will be disappointed.

Of course fundamentals and sentiment are two very different things and we all know markets trade sentiment in the near-term.  While we will likely put this emerging market turmoil behind us in coming weeks, that doesn’t mean traders won’t react emotionally to the headlines in the present.  It comes down to how upset the market is when Taper marches ahead despite emerging market worries and disappointing December employment.  But often when the market responds emotionally to news, that creates profit opportunities for those willing to take the other side.

Last year we had a “half-full” market that looked at the positive in every data point or headline.  Could these emerging market woes be a sign the market is shifting to a “half-empty” outlook?  If we see a fundamental shift in the market’s outlook and disposition, that could signal a reversal in trend.  For the time being, four days of selling is anything but conclusive, it is simply something to keep an eye on.

TRADING OPPORTUNITIES
Expected Outcome: Cautiously bullish – buy weakness
Every selloff in history has been a buying opportunity, the only question is how long it takes to show a profit.  This time is no different.  Currently the market is finding support above 1,770 for the third day.  We didn’t get a V-bottom like we’ve seen following other dips recently, but halting the emotional selloff is constructive.  Buyers are demonstrating a willingness to support the market at these levels and we’ve run out of panicked sellers.  The market is likely establishing an extended sideways trading range in order to digest all of 2013’s gains.

Alternate Outcome:
If holding 1,770 is constructive, falling under it is destructive.  Failing to hold support will elevate anxiety all over again and reignite emotional selling.  Be prepared for another leg down if we cannot hold support.

Trading Plan:
Maintaining 1,770 through Thursday is encouraging and suggests we are putting these emerging market fears behind us.  Quarters typically have personalities and ending this selloff likely means this one is finding a bottom and setting up to trade sideways.  Fail to hold support and all bets are off.

INDIVIDUAL STOCKS
Buyers have not rushed in to save AAPL and the stock is down modestly following yesterday’s plunge.  Bulls argue that AAPL is a software company not a hardware company, but given the market’s reaction to yesterday’s earnings, Wall Street thinks AAPL is little more than a phone company.  The company exceeded expectations on almost every metric expect phone sales.  Everyone agrees AAPL built an impressive and profitable ecosystem, but at its core is the iPhone.  Take that away and everything else falls down.  Maybe the Street is on to something when it focuses almost exclusively on the iPhone sales.

Plan your trade; trade your plan