PM: The 1% selloff

PM Update

MARKET BEHAVIOR
Stocks slipped a little further under 1700 but finished off the day’s lows.  Volume was well below average as few bought or sold Wednesday’s weakness.

MARKET SENTIMENT
Tapering strikes again, at least that is what the consensus claims.  The logic goes something like the following.  We recovered all of May/June’s Tapering selloff because of the Fed’s promised to keep printing money.  This obviously means the QE bubble reinflated itself, but I don’t buy it.  It is tempting to simplify the market into a single entity, but it is really complex tapestry of self-interested individuals.   Just because we recovered the Tapering selloff losses doesn’t automatically mean the QE trade is back.  To be exposed to the same risks we need to recreate the exact same ownership makeup we had two months ago.  Everyone who sold the selloff needs to buy back in and every buyer of the selloff needs to sell out.  What are the odds this happened?  Traders are a stubborn bunch and the most difficult thing is admitting we are wrong.  Very few sellers of Tapering bought back in simply because the market bounced.  In their mind they are right and it will only be time before the market finally sees what they see.  These traders continue sitting on the sidelines, hoping and praying the market rolls over to validate their previously emotional decision to sell.  We’ve all done it at some point.  It is far easier to accuse the market of being wrong than admit we are wrong.  Without a doubt the market rebounded decisively from that selloff, but it was not because of people chasing QE.  That trade is dead and buried.

Anyway, that is a really long-winded way of saying don’t pay attention to the QE/Tapering fear mongering.  Most of those weak hands bailed weeks ago and the market already priced in Tapering.  Maybe it is September, or maybe it is January, but does it really matter?  Everyone knows it is coming and those that are afraid of it are already out of the market.  Sell the rumor, buy the news.

TRADING OPPORTUNITIES
Expected Outcome:
The market is going through a modest pullback, hardly 1% off of all-time highs.  I expected support at 1700, but that was obviously a tad optimistic. The market undercut my stops and I sold for a modest profit.  It is not as much as I had a couple of days ago, but it sure beats losing money.  I still don’t believe this is the start of a larger selloff, but there is no point in having stops if we don’t use them.  But rather than take my ball and  leave in a huff, I’m ready to buy back in when the market retakes 1700.

Alternate Outcome:
The market broke support and presents the best shorting opportunity we’ve seen in a couple of months.  A bear can short here with a stop above 1695 or 1700.

Trading Plan:
Buy a recovery of 1700 and short further weakness.   Summer trade can be both volatile and listless as we’ve seen.  Take profits when we have them because they will likely be gone days later.

INDIVIDUAL STOCKS
AAPL continues its struggle with the 200dma.  This is a decent place to lock-in recent profits since this is more a relief rally than something supported by renewed fundamental strength.  If we keep holding under the 200dma for a few more days we can buy back in and ride it up to $500.

TSLA knocked the ball out of the park with its earnings after the close.  How much higher this goes is anyone’s guess, but it needs to find new buyers to continue making gains.  Previously it feasted on a seemingly endless supply of shorts, but it really feels like most shorts have run for cover.  If Thursday’s early pop fizzles into the close, consider jumping out because it shows buyers are getting scarce.  Stocks like this often top on good news when everyone is most bullish and fully invested.  At the very least move up a trailing stop to $140 or $145.

FB continues hanging in there around the $38 IPO level.  The stock that is supposed to nose over will likely continue higher.  It failed when everyone loved it and now it thrives when everyone doubts it.  Go against the crowd, not the trend.

Plan your trade; trade your plan