PM: Down-Up-Down-Up

PM Update

Markets bounced back, but will it last?  AAPL finally broke above the 50dma for the first time in nearly 6-months, does this mean the worst is behind us?

MARKET BEHAVIOR

Stocks bounced back on Friday, completing a four-day pattern of down-up-down-up.  We finished nearly where we started and this volatility did nothing but humiliate bulls and bears who reacted to these gyrations.  Volume was the lightest in over a month and 17% below normal.

MARKET SENTIMENT

The market is within ten-points of all-time closing highs and many pundits predict a Cyprus resolution will finally push us over the top.  They will only be right if that is the unexpected outcome.  If it is widely expected, it is already be priced in and the market will quickly move on to the next obsession.

The frustrating thing about meeting expectations is it doesn’t move the market.  People position their portfolio based on their expectations of the future.  If everyone expected Cyprus will be a non-issue, they already looked past Cyprus when positioning their portfolio this week.  When the Cyprus issue is resolved, since it was widely expected, no one will adjust their holdings based on this news, and without new buying and selling, the market will not react.  This single concept is the bane of fundamental and news traders because they expect news or data will cause the market to move one direction, but it often moves another simply because that news and data was already priced in.

If we take Cyprus out of the picture, what are we left with?  A fairly bullish market.  No one is talking about Sequester, Debt Ceiling, or slowing growth anymore.  Even these Euro fears are isolated to an island of 800,000 people and the PIIGS hardly get a mention (Portugal, Ireland, Italy  Greece, and Spain).  If you followed the news the last few weeks, you wouldn’t even know Asia exists because they don’t get any coverage.  Where did all the worrywarts go?  If everyone is positive, should the contrarian be worried?

TRADING OPPORTUNITIES

Expected Outcome
I have a hard time coming up with a good reason to own this market other than momentum.  Without a doubt trends are more likely to continue than reverse, but at the same time, every rally must top.  I embrace cynicism with open arms and have been bullish this entire rally from the November lows.  Here is a quote from my November 15th post, the last down-day before the market bounced for good:

“The selloff has coiled the spring for an upside move pretty darn tight and the smallest bit of good news is bound to set of a gigantic bear trap.  On the other side, a huge number of skittish sellers have already sold, meaning the  potential supply is dwindling by the day.  This is setting up for a fairly asymmetrical trade where the upside potential is larger than the downside risk.  There is no reason to jump out in front of this meat grinder, but wait patiently for the right opportunity to snap up heavily discounted shares from emotional sellers and their pain will be your gain.”

I am not a bear, I am not a bull, I’m an opportunist.  I am not perfect, but I am pretty good at this stuff, and right now I am nervous.  That doesn’t mean this market cannot go higher, and in fact my I was fairly constructive of the market on November 14th, just before we had one last selloff, but hopefully no one is going to nit-pick missing the bottom by a couple of days.

I don’t have a crystal ball and many of my earlier calls have been aided by a healthy dose of luck, but this market just makes me nervous.  Maybe I am early here, but I’m okay with that.  I would rather be out of the market wishing I was in, than in the market wishing I was out.

Alternate Outcome:
The conservative trade is always to get out early and that is what I did.  I pulled the plug over a week ago at 1555 and the market rallied higher after I sold, but I also missed out on the last week of volatile swings and have been looking for my next trade ever since.  My goal is to get out early and I clearly did that here, the question is just how early.  Did we already put in the top on the 14th?  Will we set a new all-time closing high?  How about the all-time intraday high?  What about 1600?  All of those are possible and I sacrificed profit by selling too early, but it is impossible to get the top, so either we sell too early or we sell too late.  I like selling too early because I am in a better position to identify the next high-probability trade when I am sitting on cash instead of worrying if I should sell or hold weakness.  Obviously the alternate outcome is a continuation from here and I am watching closely for signals that I should get back in.

INDIVIDUAL STOCK

AAPL finally did it, it traded above the 50dam for the first time since October 5th.  For such a momentous occasion, volume was suspiciously light.  Without a doubt low-volume could be a positive signal because it shows a huge pool of cynical buyers waiting in the wings to buy this stock.  But that ignores the fact it is downright difficult to find an AAPL bear among the throngs of AAPL defenders.  If I am reading sentiment correctly, the bullish attitude in the stock indicates the low-volume breakout is already running short of buyers before it even makes its first breakout.  Clearly I am biased here, but I have serious doubts about the sustainability of the rebound and view the next $20 as an opportunity to sell strength.

How to trade this, the momentum is clearly higher and a nimble speculator could ride this higher for another $20.  But if buying is coming from short-term traders buying the breakout, expect the move to be short-term as they quickly lock in profits.   A bigger concern is failing to hold the 50dma shows a lack of follow on buying and likely means we are headed lower.

Stay safe