Groundhog Day in September

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MARKET WRAP UP 09/15/10

Not much has changed in the past few days, as the market continues to drift higher at the very top of the multi-month trading range. Yesterday, I talked about the idea of the market pausing at the proverbial fork in the road. Today, we saw a continued sense of indecision for most of the day, before stocks staged a final hour push to close up 0.35% to 1125. Volume continues to be a dud, even after all of the summer vacations have ended. Besides the weak volume, breadth was mixed, as many of the leading stocks took a well deserved break from their extended runs.

Another theme that has been recurring in my posts over the past few days has been the notion that the trading range itself is becoming too obvious to continue to persist. Seeing as I have a 68% cash position in my portfolio, I am not exactly pounding the table to be bullish here. However, I am trying as best I can to keep an open mind to the prospect that we are in the early stages of a March or July of 2009 style melt-up. Further supporting the case that we could be in the midst of a major move higher, both the $AUD/JPY cross and the Shanghai Composite Index are exhibiting bullish signs.

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Beyond that, leading stocks such as $CRM, $FCX and $NFLX took healthy pauses today. Despite bears calling for imminent reversals in these names, the charts indicate more of a constructive consolidation than anything else. Note the lack of high volume selling in all three names. If anything, they are setting up to provide excellent buy points for patient swing traders.

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The bottom line is that just because we have seen an impressive rally thus far in September does not necessarily mean that we are going to crash. The price action in a vast array of daily charts indicates that much of the selling pressure decreased as the summer progressed, which is now allowing stocks to drift higher on light volume. My high level of cash is more an expression of patience for better buying opportunities than it is of displaying a bearish thesis.

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Into the final hour rip, I made a few trades:

• I sold out of $CTXS, taking profits.
• I sold out of $ROVI for a push.
• I bought a 3/4 position in $CBI.

All trades are timestamped inside The PPT.

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TOTAL PORTFOLIO:

EQUITIES: 32%

• LONG: 32% ($CBI $CREE $VMW $TQNT $CMG)

CASH: 68%

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Never short a boring market, indeud.

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[youtube:http://www.youtube.com/watch?v=Y_HmL4gPwZw&feature=related 450 300]r

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In Japanese candlestick terminology, a “doji” candle reflects a tight, neutral trading range, indicating indecision on the part of market participants. Depending on the size and shape of the candle, there are different types of dojis. However, for our purposes, let’s focus on the fact that a string of dojis have appeared each time the market has banged its head up against the the very top of our multi-month trading range. In short, since May we have seen several days of notable indecision at the top just before we rolled over and headed back down to the bottom of the range.

As has been one of my recurring themes this week, I submit to you the question of whether this pattern has now become too obvious and predictable to repeat this time. Assuming today continues to chug along the way it is, we will have seen three dojis in a row this week on the S&P 500 actively traded ETF, $SPY. Despite the bearish results after we saw the dojis earlier in the summer, the pattern is generally considered to be neutral. If you have not noticed it yet, the period in which we have been trending has shrunk considerably, even intraday, as momentum is drying up. The market is compressing to the point where it will eventually explode.  The easy answer is to say that we are in a trading range, and therefore the explosion will be to the downside.

But has that now become too easy of an answer?

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MARKET WRAP UP 09/14/10

The above painting illustrates a common motif in Russian folklore, where the hero knight comes to a fork in the road and sees a standing stone with the inscription: “If you ride to the left, you will lose your horse. If you ride to the right, you will lose your head.” Our current stock market reacted as if it were at a fork in the road today, as we saw indecisive doji action across all of the major indices and sectors. With the bears nudging the S&P 500 down 0.07% to close at 1121, we are still drifting at the upper end of our multi-month trading range. Volume remains uninspiring, while breadth was mixed, with the financials notably lagging.

The precise issue concerning the current market is whether there are too many traders actively seeking resistance to kick in for it to actually happen. It is often said that when everyone thinks the same way, no one is thinking. If, indeed, it is the case that the majority of market players are either flat-out bearish or underinvested bulls hoping for a pullback, then the probability of the selloff occurring drops significantly. Of course, with the VIX closing near multi-month lows, it is also a distinct possibility that the “keep it simple, stupid” approach to trading will work like a charm, and we will sink back into the broad range in the face of complacency.

Thus, my cash position continues to be large and in charge, buttressing my portfolio in the face of market uncertainty. While I am reticent to describe this market as being in a sustainable uptrend, I am keeping an open mind to the possibility that we are transitioning from an oscillating market into a trending one. The nature of a trading range over a period of time lends itself to being a far more difficult market to trade than a trending one, regardless if the trend is up or down. At a certain point, it will be strategically correct to become more aggressive with my portfolio allocation.

For now, though, the daily charts of the leading indices and sectors, seen below, are telling me to respect the high level of risk of a major move in either direction.

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The S&P 500 is closing in on the June 21st intraday high of 1131. The $SPY actively traded ETF actually made a high today that surpassed anything that we have seen since the middle of May. With all eyes on 1131, the issue is whether shorting this area has now become too obvious. To be sure, many of the leading stocks are becoming extended. At the same time, many other charts are setting up behind them, in order to move higher. Objectively speaking, this is the stuff that broad market breakouts are made of.

The hardcore bears arguing for a 2008 type of collapse have very little to support their arguments in terms of the current state of equities. Two years ago, looking at my nightly scans was basically an exercise in witnessing top after top after top after…Today, the market is much more constructive. Throughout this summer, we avoided dipping into official bear market territory, staying well above the 20% mark off of the April highs.

My outsized cash position is basically me giving respect to the trading range, as well as to the OVERBOUGHT signals in The PPT of late. Into the closing bell, I see we are closing flat. The sellers are holding at resistance thus far, but I have to wonder whether this is a trap to lure in eager bears ready to pounce.

Technically speaking, we are still in a bull market. Ignore that fact at your own peril.

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