Not much going on

Intraday Update

MARKET BEHAVIOR
Stocks are trading sideways in a tight range today as we continue consolidating recent gains.  The market remains inside the 1,810 to 1,850 trading range.

MARKET SENTIMENT
Many companies have already reported earnings, but few investors are changing their mind based on what they hear.  Prices only move when people alter their outlook and make adjustments to their portfolios.  So far few traders are buying or selling based on the results companies are posting.  Bulls are staying bullish, bears are staying bearish, and those out of the market remain reluctant to chase.  Even though we are still early in the earnings cycle, enough companies have reported reasonable results that is it unlikely the back half of earnings seasons will bring any macroeconomic surprises.  Obviously there will be big moves in individual companies, but for the most part the fragile recovery is no better or worse than people thought coming into this.

In this case no news is good news.  Stocks have a natural upward bias and without a reason to sell, most owners continue holding.  The resulting tight supply supports prices and makes it more likely the next move will be higher.  The sideways trade is wringing out some of the euphoric bullishness seen in December.  AAII’s sentiment survey shows the percent of Bulls dipped under 40% for the first time since November.  It is also worth nothing that the number of bears is also falling in recent weeks as the percent of Neutrals swelled to the largest level in months.

With the self-identified Bulls and Bears, it is obvious what their outlook is and how their portfolios are likely positioned.  I don’t like the term Neutral because a person can be an underweight Neutral or an overweight Neutral.  When looking for the next market move, it will likely be driven by these Neutrals since the are the most uncommitted and easiest to persuade.  Why it is important to know how they are positioned is because if they are fully invested, there is only one move they can make.  If they are out of the market, then for the average investor, there is only one move they can make.

By itself the Neutral reading doesn’t give us a lot of information directly.  But digging one level down, we see bullishness since Dec decreased 16% and bearishness only increased 3%.  That means most of the growth in Neutral outlook came from former Bulls.  Coming from a bullish bias, that makes me suspect our current crop of Neutrals is more overweight than underweight, especially since we have not seen a gut wrenching selloff trigger a large wave of emotional selling.  Most of these former bulls are less optimistic than they were a month ago, but their portfolios likely still reflect a bullish bias.

TRADING OPPORTUNITIES
Expected Outcome:
Cautiously Bullish – Inside Trading Range
Unsustainable markets rollover quickly and holding these levels for nearly a month suggests  a solid foundation under the market.

Alternate Outcome:
While the a move higher is more likely, with such a high level of comfort and complacency in the market, it is vulnerable to a wave of panic of hitting owners, triggering a mad dash for the exits.  So far owners have grown immune to modest selloffs, but be on the watch out for that one event that turns confident owners into nervous sellers.

Trading Plan:
Holding these levels suggests the next move is higher.  Long-term investors can continue holding.  Bears should avoid shorting.  Swing traders can sell strength and buy weakness until we breakout out of this trading range.

Plan your trade; trade your plan