A Journey Through Stock Market Purgatory

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MARKET WRAP UP 07/28/10

Stocks drifted lower for the second day in a row, as the S&P 500 finished down 0.69% to 1106. After the sharp run up that we have seen this month, from 1010 to 1120, some type of correction was to be expected. The issue is whether the correction would be one rooted in the passage of time, the relinquishing of prices, or both. Thus far, the bulls have avoided any 3% down type of bloodbath days, which illustrates their resiliency. On the one hand, as I pointed out earlier today in a post, just because we are churning sideways instead of down after a strong move higher, does not necessarily presage higher prices, as witnessed by the bearish outside reversal trap on June 21st of this year. On the other hand, we have already seen what can be argued as a higher low, at the 1056 level last week.

As the updated and annotated daily chart of the S&P 500 illustrates below, the bulls are struggling to maintain control of the price action, despite the fact that we are trying to work off overbought conditions in the face of resistance from the multi-month trading channel.

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Beyond the S&P, the Nasdaq, Russell 2000, Dow Jones Transportation Average, as well as the emerging markets all indicate the state of purgatory that market players find themselves in for now. Their annotated and updated daily charts, seen below, show that they continue to outperform the S&P, which remains a bullish omen.

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A key level that I am watching is 1100 on the S&P. That price marked resistance during the middle part of this month. Should the bulls prove inept in holding on to it, the bears will seize the opportunity to push us back down into the even choppier range of 1050-1100. Thus, as boring as it is to be in heavy cash during the summer doldrums, I will continue to do just that until this range resolves itself. Beyond that, many stocks are providing attractive entry points during this consolidation, so long as it remains as a mere consolidation, as opposed to the beginning of another leg down.

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TOTAL PORTFOLIO:

EQUITIES: 22%

• LONG: 22% ($BX $SAPE $POWR $JMBA)

CASH: 78%

The market is well into its second straight day of consolidation after an impressive run up over the past few weeks. In the short term, many charts became overextended and needed some backing and filling, at a minimum. I am still going to let this market prove itself to me first, before I start chasing momentum to the upside.

One thing to note is that just because we are consolidating in time, and not so much in price, that does not necessarily make it bullish per se. As an example, take a look at the daily $SPY chart that I have included below. Note how in mid to late June we had a string of dojis as well. Despite giving off the appearance of a bullish consolidation, we rolled over in swift fashion.

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This is why cash continues to be such a powerful position in this kind of market environment. No one knows for sure whether we are still in that range bound channel, or whether we have surely broken out to a new trend higher. However, one thing is for sure: Getting caught aggressively leaning the wrong way in the face of the next big directional move is going to be destructive to your capital.

[youtube:http://www.youtube.com/watch?v=PQCIH6xxTbw 450 300]

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MARKET WRAP UP 07/27/10

Stocks more or less flatlined today, as the S&P 500 closed down 0.10% to 1113. As I have been discussing, the recent rally has brought us back to the upper end of our multi-month trading range. Despite the fact that many stocks have shown promising breakouts, we are going to need more evidence before we presume that the oscillating market has completed the metamorphosis into a trending one. Coinciding with the top end of the broad trading range, the 200 day moving average on the S&P has been tough resistance as well, since May 20th of this year. Even if we are on the verge of breaking out –and holding–above the 200 day moving average this time, we are likely to tiptoe around this area for a while longer.

As the updated and annotated daily chart of the S&P 500 illustrates below, a short term pause seems to be in order.

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Similarly, turning to other key indices and sectors, the Nasdaq, small caps, trannies and emerging markets have all enjoyed steep moves higher. Now, however, they appear prime for a breather (see charts below).

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Finally, to update two key broad market “tells” in the charts below, $FCX could pull back here after a steep move higher, and still be operating in a bullish space. $GS, on the other hand, would be better served to continue flattening out here, as a break down below the ascending triangle would be bearish.

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With my cash position just south of 80%, I am in no mood to get caught leaning the wrong way when the market makes its next big move. My goal right now is to maintain my focus, despite my huge cash holding, because the market can be such a dynamic beast and turn on a dime. When the next direction of the market is revealed, I will be in a good position to take advantage of it.

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TOTAL PORTFOLIO:

EQUITIES: 22%

• LONG: 22% ($BX $SAPE $POWR $JMBA)

CASH: 78%

I sold out of the rest of my $ARUN stake. It was a pretty big winner for me, in this type of market.  I want to discuss why I am content selling here. Normally, if we were in an upward trending market, I may let this winner run. However, until proven otherwise, we are still in an oscillating market sideways, where buying the dips and selling the rips are rewarded.

As the updated chart of $ARUN illustrates below, despite the fact that the stock is green (slightly) for the sixth day in a row, the candles are starting to express indecision on the part of the bulls, in the form of dojis.

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There is always the possibility for overbought to become more overbought. However, I believe that the high percentage play is to take off the rest of my position here. Indecision at the top usually presages a move lower. With profits in the bag, why jeopardize them in the face of this change of events?

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TOTAL PORTFOLIO:

EQUITIES: 22%

• LONG: 22% ($BX $SAPE $POWR $JMBA)

CASH: 78%

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With both The PPT and the McClellan Oscillator signaling short term very overbought conditions, in addition to the prospect of a parabolic move higher from the failed head and shoulders top–think July 2009– this market is presenting us with an interesting situation. On the one hand, it seems as though the consensus view is to either move to all cash, or put on some shorts here. Therefore, it follows that the contrarian play would be to press longs here, typifying the pain trade.

On the other hand, betting on a parabolic move higher again from the failed head and shoulders does not offer a favorable risk/reward profile, in my view. The daily charts of the broad indices indicate that we have retraced the move back to the “scene of the crime,” where we rolled over and headed straight down, starting on June 21st of this year. Basic psychology dictates that the concept of overhead supply is likely to cause a period of consolidation, at a minimum. Many of the longs who bought or added in mid to late June, thinking the correction was over, have endured a wild ride down. They are more likely to sell than to hold or buy more, when they are finally close to being made whole again.

To illustrate the intraday volume, I am including an up to date chart of the $SPY. See my notes on the chart below.

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