Slip ‘n Slide Summer Tape

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MARKET WRAP UP 07/06/10

The past eighteen hours have featured several reversals, frustrating bulls and bears alike with respect to timing Mr. Market’s short term machinations. It was just late last evening that traders were eyeing a major breakdown, with the futures printing close to 1000 on the S&P 500. However, those futures recovered impressively by the opening bell this morning to catapult us to 1042. At that point, we reversed course and slowly faded those intraday gains, before chopping around to close up 0.54% on the session to 1028 by the time the closing bell rang.

Ironically, all of these herky jerky moves in this slip ‘n slide market can be viewed as cathartic and an overall bullish omen, as the last of the complacent bulls are shaken out. It will be only if we break–and hold– below the July 1st intraday low of 1010 that the hammer will have been negated. Beyond that, the broad indices and sectors remain oversold.

Nonetheless, as the updated and annotated daily chart of the S&P 500 illustrates, the 1040 level acted as resistance today, after being support for several months (see below).

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Turning to other sectors, the emerging markets represent perhaps the most notable pocket of strength, as their ETF put in a nice hammer last Thursday, and has seen sound confirmation even since (see below).

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Conversely, one of the recurring arguments advanced by the bears since last week has been the persistent weakness in the transportation stocks. To be sure, they did not print a hammer last Thursday, so much as they did a long legged doji. However, as I note on the daily chart of their ETF below, the trannies are in a tight falling wedge, within the context of a downtrend. This is often considered to be a bullish reversal pattern.

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Perhaps the most inconsistent argument that the steadfast bears have been making is that the small caps are the “tell” for this market. Nothing could be further from the truth. The recent weakness in the small caps has caused many bearish traders to argue that the broad market has much further to fall.

However, as you can see from my chart below, the small caps have not been leading us down and, in fact, have been outperforming the broad indices and sectors throughout this whole correction since April. Indeed, the small cap ETF has yet to breach the February lows, whereas we already know the broad indices did so early last week. For the small caps to finally show weakness now would be much more of a lagging, than leading, indicator for the market, in my view.

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My analysis continues to lead to me to believe that this market is headed higher in the coming days and possibly weeks. I do not challenge the overarching downtrend since April. In fact, I foresaw it. However, I see technicals and sentiment lining up in favor of a short term bounce.

Individually, my top holding and best idea is still $NR. If you agree with my bullish analysis of this issue, chasing it here is still not correct. However, you will want to keep a close eye on it for a benign pullback, given the strong and consistent buying volume over the past few months (see below).

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Finally, should the market see some sustained buying in the coming days, my top short squeeze idea is to play the homebuilder sector, as I detailed last evening. A stock like $LEN would give you a high beta short squeeze, for a short term trade.

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