Buyers on Strike

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MARKET WRAP UP 06/24/10

For the fourth day in a row, the S&P 500 finished in the red, as any meek intraday attempts at a rally were met swiftly with fresh supply. Not only did we lose the 20 day moving average on the benchmark index, but that reference point (currently at 1090) also acted as resistance from the moment the opening bell rang. Further, we fell back into the bearish descending triangle that had been forming for the past several months. Above all else, there were simply no powerful buyers with conviction that came to work today.

As the updated and annotated daily chart of the S&P 500 illustrates, about the only two things that the bulls can hang their hats on is that volume has been weak, and we are now short term oversold again (see below).

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While the possibility of forming a right shoulder of an inverted head and shoulders bottom may still be in the cards, the bulls have thus far shown no initiative in doing so. However, as noted above, volume continues to be far below what is was during the previous legs down in May and early June. Thus, the inverted head and shoulders scenario should not be disregarded on a whim.

Indeed, if we are following the 2004 script, we should base out from now until early August, before breaking out. Below is a scenario that would pretty much be in line with 2004.

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Respecting the 2004 scenario is important, because psychologically investors experienced similar markets in the two years prior. For example, both 2002 and 2008 were years characterized by unrelenting selling that is typical of a vicious bear market. After those years, 2003 and 2009 were years where the market turned on a dime and sprinted much higher, with most traders doubting the move higher the whole ride up. After two dramatic years in a row, 2004 was a fairly flat year that chopped up many traders, during the summer especially, after a solid first several months. Although history rhymes more so than it repeats, we are seeing a similar scenario play out in 2010 as we did in 2004.

As for my portfolio, I made no changes today. My longs were down 1-2% across the board, while my cash and $TZA hedge cushioned the blow.

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TOTAL PORTFOLIO:

EQUITIES (Including ETF instruments):42%

• LONG: 34% ($APKT $LULU $CRM $GMXR $ISH $DECK $THOR)
• SHORT/HEDGED: 8% ($TLT $TZA)

CASH: 58%

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