MARKET WRAP UP 08/03/10
On the back of yesterday’s 2.20% move higher to open the month, the price action today was not unlike a poor sequel to a good movie. Breadth was negative, as healthcare and energy were the only major sectors in the green. Volume was slightly higher, as the overhead supply that I discussed yesterday came to fruition in the morning, with longs who had been trapped earlier this summer using the recent rally as a selling opportunity. All in all, with the S&P 500 closing down 0.48% to 1120, today was an “inside” day, where the price action was within the confines of yesterday’s range.
Despite the lack of strong follow through from yesterday’s rally, the bulls maintained the initiative. The bears proved inept in doing any noticeable technical damage today. In fact, when the morning gap down to 1116 was quickly bought, it marked a perfect retest of the late July highs. While a benign consolidation period after a sharp run up is not a sure thing (no such thing in the market), the odds do favor a continuation of the bull trend of higher highs and higher lows. Accordingly, I increased my long exposure today, taking it up to 48% of my portfolio.
As the updated and annotated daily chart of the S&P 500 illustrates below, the series of higher highs and higher lows is confronting the fact that we are also at the very top of our multi-month trading range.
I am going to focus the rest of today on the financial sector. Everyone seems to be talking about the $15 level on the $XLF. To be sure, the financials were one of the sectors that led us down in mid April, presaging the broad market correction. Given the proximity of the financials to the bubbles and crashes in equities over the past few years, it makes sense to take a look at them in multiple time frames.
In sum, it is not safe to presume that the next move is lower just because both the S&P and the financials are at the upper end of their multi-month trading ranges. My strategy going forward is to build up my long exposure, so long as the broad market continues to act constructively, and I see quality setups across the board. Presuming anything in the market can be dangerous, but the improved price action cannot be ignored. I continue to see the number of quality setups improve almost on a daily basis. Should the market take a turn for the worse, however, my plan is to immediately hop into downside hedges, and lock in some profits on my longs.
- LONG: 48% ($COCO $GNK $LSCC $GSI $RDWR $BX $SAPE $POWR $SWSI)
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