Not a Dealbreaker

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MARKET WRAP UP 10/04/10

In front of both another earnings season and a government-sponsored jobs report later this week, the S&P 500 saw a good deal of profit-taking today. The real action came just before the New York lunch hour, as the bears were finally able to sink their claws into the broad indices. In the afternoon, however, the action abated as the S&P 500 chopped around before closing down 0.80% to 1137. The good news for the bears is that breadth was pretty poor, with all major sectors flashing red. Despite the lack of green, the selling volume was not particularly intense, indicating that institutions were not sprinting to exit their bullish bets.

Within the broad scheme of things, the bulls firmly held a retest of the summer breakout around 1131. If the bears are going to submit a deal breaker to the bull thesis, then they simply must break and hold below the summer highs. If not, then days like today will be remembered as simply giving many charts the time that they needed to firm up and prepare for another leg higher. Leading stocks, such as $AAPL, $CRM, and $NFLX all have had several days to digest their recent gains, and they have also pulled back to their respective 20 or 50 day moving averages. Looking ahead, it will be telling to see whether the bulls will able to assert themselves at obvious support zones. Thus, with those key stocks hanging in the balance, my strategy today was to raise slightly more cash and exercise patience.

It is often said by many Wall Street critics that investors or traders picking stocks and trying to make money have no better odds than a monkey throwing darts at a board. After consolidating in a tight range for two full weeks, there will most certainly be a group of traders who are caught leaning heavily in the wrong direction whenever the market explodes (crashes) from this compressed state. However, as individual traders we have exclusive control over how much risk we decide to take. Despite how many stocks have worked through bases during the past few months, I am still reticent to become very aggressive with the market oscillating between 1130 and 1150.

On this one, it is best to leave the front-running to the monkeys.

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