MARKET WRAP UP 06/28/10
Harry Cohn, the legendary crude movie mogul in charge of Columbia Pictures, once said at a film screening, “I know it’s a bad film because my ass itched. If my ass doesn’t itch, the film is OK.” A similar analogy can be drawn to the current state of the stock market, as both bulls and bears are being chopped to pieces. With the S&P 500 closing down 0.20% to 1074, making any directional bets whatsoever appears to be more of a gamble than eating three day old sushi. If this market is making your ass itch, I can assure you that you are not alone in that sentiment.
As the updated and annotated daily chart of the S&P 500 illustrates, we are in the middle to lower end of the broad trading channel where we have been operating for the past five weeks (see below).
As I noted over the weekend, we are simply going to need more information before becoming aggressive in either direction. This market clearly needs more time to resolve itself. As a consequence of the broad indices being trapped in this corrective, neutral range, many individual issues are seeing false breakouts. Thus, keeping positions small, and hedged with a large cash position is still my best strategy. With the July 4th holiday coming up, as well as the end of the quarter, the fact that this market is having trouble sustaining any kind of bounce is particularly indicative of weak demand for equities.
I also want to extrapolate on something that I mentioned in my above daily chart. Although the 200 day moving average is still rising, its rate of ascent is clearly coming to a screeching halt. Moreover, the 50 day moving average is sloping down hard like Apolo Ohno on the last leg of a speed skating race. I have not done the math specifically, but a death cross of the 50 day down under the 200 appears inevitable in the coming weeks. While a death cross is not the guaranteed end of life as we know it, it is something that needs to be closely watched.
Just as, if not more, important is the slope of the 200 day moving average. Should it flatten out and then turn down, history indicates we would be entering a brand new cyclical bear market, within the context of an overarching secular bear. One reason why I have been so reticent to aggressively short over the past few months is because of the rising 200 day m.a.. However, once it turns down, the game changes, and shorting becomes the default marquee strategy.