PM: Tough day for bears

Bears got taken to the woodshed today were bloodied yet again.  Many of the value investors who were accumulating shares over the last few weeks are comfortable and confident with their positions and their discipline prevented a wider emotional selloff.  The selloff is coming, just not yet.

MARKET BEHAVIOR

It was a big day in the markets with a 25-point swing between the high and low.  In the first hour of trade it looked like the market was breaking down, but the selloff ended just as quick and the subsequent rally continued through the day.  We finished higher by 0.8% and regained the highs of this recent rally.

MARKET SENTIMENT

It was a bad day to be short and this was clearly a bear trap that snared a lot of pessimists.  As I mentioned on Tuesday, this was the wrong time to be short the market.  There is nothing wrong with taking profits here, but it is a little early to be jumping on the short bandwagon.

Volume was just a hair under average and similar to what we saw on Tuesday.  The relatively modest volume showed that while this was a wild ride, not a lot of people were sucked in by the apparent breakdown or subsequent reversal.  This further reinforces the idea that many of the buyers over the last few weeks are confident and prepared to hold through some volatility.  Their willingness to sit tight in the face of selling pressure is what constrained supply and lead to the bounce.

Yesterday I talked about how all the selloffs in the last 5 years were great buying opportunities.  Obviously this isn’t always the case, so how do we tell the difference between a buyable dip and the start of a bear market?  It all comes down to what other traders think.  Right now everyone is obsessed with the Fiscal Cliff and all the other negative headlines out there.  It is this widespread negativity that shows we are still in a bull market.

Compare this to the spring of 2008 after the market already sold off from the 2007 highs.  Even then complacency was the norm as everyone was used to easy money and viewed the market as an attractive buy.  At the time Obama and Hillary were fighting for the Democratic nomination and in the process were trashing Bush and the economy.  Investors took a lot of offense to Hillary and Obama suggesting we were entering a recession.  In fact the candidates were so widely criticized for spooking people that they started referring to it as the “R-word” so everyone would back off.  Obviously Hillary and Obama were simply making political hay and had no idea what was about to unfold, but that obliviousness by everyone is exactly what set the stage for a major selloff.

The question we have to ask in the present day is if traders are complacent and oblivious to the risks in front of us.  Not only are investors in tune with the risks in the world, so is the average Joe.  This doesn’t mean we won’t have volatility and selloffs, but those selloffs are buying opportunities, not a time to head for the hills.  Given how badly the 2008 selloff damaged the average investor’s psyche, I think it will be years before we see widespread complacency lead to a major bear market.

TRADING OPPORTUNITIES

Given the strong reversal today, the 50dma is within easy reach and the bigger question is whether we will break through it or hit our heads.  The market is sensitive to headlines and the building expectations of a Fiscal Cliff resolution are setting the stage for disappointment as negotiations drag on.  While the Fiscal Cliff is not as big of a deal as other crisis in recent memory, it will be enough to spook emotional traders and present an attractive profit opportunity for a savvy trader willing to go against the grain.

In the near-term look for the market to rally a bit more before pulling back.  The selloff will be swift and decisive, but it will find support after breaking the 200dma and 1400.  I’m not a psychic and can’t predict if we’ll make new lows or not.  But if we take our profits early, it really doesn’t matter.  The more important trade will be buying this Fiscal Cliff selloff and getting ready for the inevitable bounce.

INDIVIDUAL STOCKS

AAPL is trading sideways and consolidating recent gains after bouncing off of the $500 level.  What was the must have stock became the must short stock.  It worked if you were daring enough to get in, but this stock is too much of a darling to not bounce hard when the price declines this much.  No matter what the fundamentals show, many traders are infatuated with AAPL and will buy it all the way down.

As for the fundamentals, I have yet to see a young person with an iPhone5.  The Samsung Galaxy SIII is the new cool kid on the block and I’ve seen far more of those than iPhone5s.  No doubt there are a lot of soccer moms who still lust for an iPhone5, but the days of undisputed rule are coming to an end.  AAPL makes a great product, but expect competition to hammer market share and profit margins in coming years.  Of course this is a longer viewed prognosis and in the near-term the emotional volatility surrounding AAPL will make for some great swing trading.

Stay safe