A Harry Cohn Market

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MARKET WRAP UP 06/28/10

Harry Cohn, the legendary crude movie mogul in charge of Columbia Pictures, once said at a film screening, “I know it’s a bad film because my ass itched. If my ass doesn’t itch, the film is OK.” A similar analogy can be drawn to the current state of the stock market, as both bulls and bears are being chopped to pieces. With the S&P 500 closing down 0.20% to 1074, making any directional bets whatsoever appears to be more of a gamble than eating three day old sushi. If this market is making your ass itch, I can assure you that you are not alone in that sentiment.

As the updated and annotated daily chart of the S&P 500 illustrates, we are in the middle to lower end of the broad trading channel where we have been operating for the past five weeks (see below).

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As I noted over the weekend, we are simply going to need more information before becoming aggressive in either direction. This market clearly needs more time to resolve itself. As a consequence of the broad indices being trapped in this corrective, neutral range, many individual issues are seeing false breakouts. Thus, keeping positions small, and hedged with a large cash position is still my best strategy. With the July 4th holiday coming up, as well as the end of the quarter, the fact that this market is having trouble sustaining any kind of bounce is particularly indicative of weak demand for equities.

I also want to extrapolate on something that I mentioned in my above daily chart. Although the 200 day moving average is still rising, its rate of ascent is clearly coming to a screeching halt. Moreover, the 50 day moving average is sloping down hard like Apolo Ohno on the last leg of a speed skating race. I have not done the math specifically, but a death cross of the 50 day down under the 200 appears inevitable in the coming weeks. While a death cross is not the guaranteed end of life as we know it, it is something that needs to be closely watched.

Just as, if not more, important is the slope of the 200 day moving average. Should it flatten out and then turn down, history indicates we would be entering a brand new cyclical bear market, within the context of an overarching secular bear. One reason why I have been so reticent to aggressively short over the past few months is because of the rising 200 day m.a.. However, once it turns down, the game changes, and shorting becomes the default marquee strategy.

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I can feel myself being chopped up in this market. Rather than fight the tape, I am going to raise more cash and possibly redeploy it later today. Thus far, I made the following trades.

(All trades timestamped inside The PPT)

• I sold out of my 1/2 long position in $DECK for a loss.
• I sold out of the rest of my $APKT long for a gain.
• I sold out of my $TZA hedge.

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TOTAL PORTFOLIO:

EQUITIES (Including ETF instruments):38%

• LONG: 30% ($LULU $CRM $GMXR $ISH $THOR)
• SHORT/HEDGED: 8% ($TLT $QID)

CASH: 62%

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These are posted to be trading ideas only. If you choose to follow me in, I urge you to use stop losses to mitigate your downside risks.

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As I discussed in my previous post, the broad market is still in a wide and choppy range. Buying breakouts in these types of markets has been an unprofitable strategy thus far, and I expect that to continue. A better strategy for the long side is to look for strong stocks holding up exceptionally well, that have come back to support.

My best trading idea for this week is to go long $SNDK. I currently hold no position in the name, but the daily chart shows a very bullish volume pattern working in concert with strong price action over the course of the past several months. I like how the stock printed a hammer on Friday, after a week of pulling back in an orderly way. I would place a stop loss below the 50 day moving average, around $43.20.

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Another name to keep an eye on is $WYNN. Even if you do not trust the breakout, the chart has stabilized nicely since early May. If you have patience and a bit longer term time frame, you need to be stalking this one to see if it continues to setup and build a healthy base.

Steve Wynn is, bar none, the best casino operator in the world. His properties are best in breed, and this stock will lead the sector on the way up, should we see a breakout in the coming months. Patience is key here, so please do not rush out and chase this name.

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Some of the China names have been performing well lately. $CTRP, $BIDU and $HMIN are all fine examples. The higher beta “Chinese burritos” that got crushed over the past few months appear to be stabilizing here. Again, these are not names you necessarily should be chasing, but you should keep them on your watchlist to see if they continue to base out.

Look for low selling volume, and stronger buying volume, coupled with moving averages that start to flatten out after having been in a steep slope down for several months. $CGA, $RINO and $CAGC are all examples, as well as $HEAT, which The Fly owns.

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Finally, I am in agreement with Jake Gint and the Ragin’ Cajun that the gold miners may indeed be on the verge of a major breakout, and my favorite in the group is $IAG, which I traded for a nice profit earlier this month. Below, you will see the ETF for the miners, followed by $IAG.

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By now, you are probably aware of the possible scenarios for the broad indices, going forward. The sexiest thing to talk about is the longer term head and shoulders topping pattern that we may have been forming since the beginning of this year. I have also discussed the possibility of an intermediate term inverted head and shoulders bottom. It is important to always consider scenarios as a trader, so as to try to limit the amount of times that Mr. Market will catch you off guard.

With that said, I am going to focus this post on what the market is actually giving us at the present moment. The updated and annotated daily chart of the S&P 500 shows that the bears owned all of last week. After Monday’s head fake and subsequent sharp reversal from 1131, we saw a steady move lower to 1067 (see below).

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Since that huge down day on May 20th, the market has been in a channel. Although we have made higher highs, we have yet to make lower low. At the same time, the trading channel is very sloppy, and not particularly bullish looking. Moreover, the channel needs more time to develop and, especially, needs to make another higher low before we can determine that it is constructive for the market. The chart below should illustrate this channel, which I have denoted with yellow lines.

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It is not quite a megaphone topping pattern like we saw in late April, because we have not been making lower lows. Thus, the channel can best be described as neutral for now. We are simply going to need more information before making more aggressive directional bets. The bulls need to see a higher low–and subsequent rally–this week. The bears, however, are looking for yet another test of 1040, which could easily fail given how obvious of a support level it has become over the past eight months.

Thus, my portfolio continues to be hedged, with an overweight cash position.

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Finally, let’s take a big picture look at the ETF’s for the two main precious metals. The weekly chart on Gold remains bullish. Trying to call a top to the move in Gold is proving to be, well, fool’s gold. The yellow metal is in a secular bull market, and I do not see any evidence of a blow off top that usually accompanies the end of secular bulls.

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The Silver weekly is still trying to break out of the triangle that I pointed out several weeks ago. If Silver is going to catch up to Gold, you have got to love the upside here.

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Although the precious metals got crushed in the 2008 crash, Gold and Silver have historically done quite well during prolonged periods of debt deflation in society. If going long these metals and/or their miners is not your style, then so be it. However, I must say that I see absolutely no evidence that would lead me to believe that shorting these metals is a high probability trade.

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

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Continuing with my strategy of a hedged portfolio, with an overweight cash position, I made two trades today:

• I bought a 1/2 position in $QID, an ultra short technology ETF.
• I bought my final lot in $GMXR. I now have a full position in the name.

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TOTAL PORTFOLIO:

EQUITIES (Including ETF instruments):49%

• LONG: 37% ($APKT $LULU $CRM $GMXR $ISH $DECK $THOR)
• SHORT/HEDGED: 12% ($TLT $TZA $QID)

CASH: 51%

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Please remember to respect risk, use stop losses, and do your own homework. Otherwise, you may have to go see “The Special Man.”

[youtube:http://www.youtube.com/watch?v=XI7jC57GuZM 450 300]

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MARKET WRAP UP 06/24/10

For the fourth day in a row, the S&P 500 finished in the red, as any meek intraday attempts at a rally were met swiftly with fresh supply. Not only did we lose the 20 day moving average on the benchmark index, but that reference point (currently at 1090) also acted as resistance from the moment the opening bell rang. Further, we fell back into the bearish descending triangle that had been forming for the past several months. Above all else, there were simply no powerful buyers with conviction that came to work today.

As the updated and annotated daily chart of the S&P 500 illustrates, about the only two things that the bulls can hang their hats on is that volume has been weak, and we are now short term oversold again (see below).

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While the possibility of forming a right shoulder of an inverted head and shoulders bottom may still be in the cards, the bulls have thus far shown no initiative in doing so. However, as noted above, volume continues to be far below what is was during the previous legs down in May and early June. Thus, the inverted head and shoulders scenario should not be disregarded on a whim.

Indeed, if we are following the 2004 script, we should base out from now until early August, before breaking out. Below is a scenario that would pretty much be in line with 2004.

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Respecting the 2004 scenario is important, because psychologically investors experienced similar markets in the two years prior. For example, both 2002 and 2008 were years characterized by unrelenting selling that is typical of a vicious bear market. After those years, 2003 and 2009 were years where the market turned on a dime and sprinted much higher, with most traders doubting the move higher the whole ride up. After two dramatic years in a row, 2004 was a fairly flat year that chopped up many traders, during the summer especially, after a solid first several months. Although history rhymes more so than it repeats, we are seeing a similar scenario play out in 2010 as we did in 2004.

As for my portfolio, I made no changes today. My longs were down 1-2% across the board, while my cash and $TZA hedge cushioned the blow.

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TOTAL PORTFOLIO:

EQUITIES (Including ETF instruments):42%

• LONG: 34% ($APKT $LULU $CRM $GMXR $ISH $DECK $THOR)
• SHORT/HEDGED: 8% ($TLT $TZA)

CASH: 58%

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