Violent Rejection

____________

On June 21st of this year, the S&P 500 gapped up on a Monday morning and tagged 1131, only to turn immediately down in pretty much a straight line for the next two weeks. Similarly, on July 1st of this year, the S&P briefly touched 1010 before seeing another reversal, as we ended this week just under 1078. Incidentally, we closed this week roughly at the midpoint between 1131 and 1010, further illustrating that we are not in a trending market, so much as we are in a channeling one (see below for updated daily chart).

_____________

_____________

With the broad market in correction since late April, you would think that the correct play was to aggressively short the breakdown below the crucial 1040 price a few weeks ago. However, we blew back up through that key zone this past week, and that trade is now underwater. It is often said in the stock market that aggressive moves come from failed moves. Well, we are seeing that in both directions. The proper strategy in this market has been to fade both breakouts and breakdowns. True, you could have scalped some quick coin from 1040 down to 1010 as a short, but look how quickly your face would have been ripped off had you not nimbly covered.

The conclusion that I draw from the above analysis is that this is still a market where discretion is the better part of valor. As boring and repetitive as it may seem for me to say, I believe that cash should be your biggest position until we find ourselves back in a trending market, where making money is easier. Buying the dips and selling/shorting the rips can reap big rewards in this kind of market, but that strategy also carries a high level of risk–just witness how long we stayed oversold two weeks ago. If you have been following my posts, then you know that I have been engaging in some trades, but have always done so with a fairly large cash position to boot, along with occasional hedges.

With earnings season, another round of economic data, not to mention options expiration coming up this week, the amount of variables at play leaves me quizzical at how anyone can have conviction in this market in either direction. Clearly, the bears have the longer term initiative, with the downsloping 50 day moving average likely to touch price this week. Further, the last time that the S&P held above the 20 day moving average for a few sessions in late June, it turned out to be a vicious trap. Now that we have worked off last week’s oversold condition, I will look to further reduce my longs into any strength that we may see early next week. However, keep in mind that a repeat of a 2004 type of scenario would lead to another heartbreak for the bears by the end of the summer.

As I wrote yesterday, what the bulls need more than anything else is a higher low. Ideally, a pullback to 1040-1050, followed by strong institutional buying, would compel me to make more aggressive bets on the long side. For the bear case, a swift rejection of either the 20 or 50 day moving average this week, followed by another break of the 1040 level would put that 1010 low in grave danger of being violated. Should that latter case materialize, the now ubiquitous head and shoulders top that has been forming since January would finally come to fruition.

____________

TOTAL PORTFOLIO:

EQUITIES: 36%

• LONG: 36% ($NR $NTAP $LULU $CRM $THOR $APKT)

CASH: 64%

If you enjoy the content at iBankCoin, please follow us on Twitter