Party Like It’s July 2009

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MARKET WRAP UP 07/13/10

On the sixth day of their winning streak, the bulls showed no signs of letting up, as a big morning gap higher held for the duration of the trading session. With the S&P 500 closing up 1.54% to finish at 1095, the bulls negotiated the 20 day moving average quite handily. In fact, we blew past the 20 day and closed right on the nose of the downsloping 50 day moving average. Breadth was also solid as all of the major sectors closed convincingly in the green. Volume was higher than the past few days, but overall was still quite weak and not indicative of institutions buying with conviction.

Interestingly, the sharp rally that we have seen since we hit 1010 on July 1st conjures up memories of last summer. As you may recall, last June and early July, many traders were calling for a head and shoulders top that would take us back to the March 2009 S&P lows of 666. With the memories of the vicious bear market fresh in their minds, many traders got caught leaning heavily short in early to mid July. However, as we know by now, the head and shoulders top failed miserably, and we saw a parabolic multi week rally higher instead.

This time around, many traders were also looking for a head and shoulders top. When we broke through 1040 a few weeks ago, even the financial news media got in on the act, declaring that the neckline had been broken and thus we were going much, much lower on the indices. Instead, after briefly breaking below 1040 and hitting 1010, we sharply reversed back up into the broader multi month trading channel in which we have been operating.

Going forward, the issue is whether we continue another aggressive multi week move from the possibly failed head and shoulders topping formation. As the updated and annotated daily chart of the S&P 500 illustrates below, the past six days have been impressive, but have so far only brought us back up to a level where we chopped around in late May.

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In the charts below, the Nasdaq, Russell 2000 (small caps) and Dow Jones Transportation Average all show that we are nearing what should be some tough near term resistance levels.

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Thus, I believe it is premature to conclude that we have seen a change in the overarching trend from bear to bull. To be presumptuous here could be very costly, should we roll over again. My strategy in a situation like this is, first and foremost, to hold off on any shorts until we see some definitive evidence that the market has failed at resistance and wants to turn down again. Beyond that, I will slowly peel off my remaining longs into further strength, as I did today. I am still looking for a higher low before I get more heavily involved on the long side.

The weakness in my strategy is if we see a repeat of last summer, and we continue to go straight up, despite being short term overbought. If that happens, then so be it. I have no problem climbing the wall of worry, as I did in lockstep with the market until this past April. However, I believe in at least regaining my balance and assuming an athletic position before climbing that wall.

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TOTAL PORTFOLIO:

EQUITIES: 24%

• LONG: 24% ($NR $NTAP $LULU $CRM $THOR)

CASH: 76%

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