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MARKET WRAP UP 09/21/10

To give you an idea of how much ground the market has covered in just the past two days, coming into Monday I discussed the idea of 1131 on the S&P 500 acting as a price magnet pulling us higher. Today, the S&P came within a point and a half of hitting the next important price level, 1150, before turning back and finishing down 0.26% to 1139. Indeed, we saw the usual pattern occur on days when the Federal Reserve makes an announcement: dead price action before 2 p.m., followed by violent intraday whipsaws for the duration of the trading session.

Across many indices and sectors, as well as on the individual charts of some key stocks, we printed long legged doji candles. In Japanese candlestick terminology, a long legged doji is one of the exaggerated types of doji candles, denoting extreme indecision. During the course of the candle’s time frame (here, it is one trading session), the buyers were able to push price higher before a sharp bout of profit taking kicked in. Even though price finished the session relatively unchanged, when you see this type of a candle after a prior uptrend, it warrants caution in the immediate future. As is the norm with single candles, confirmation to the downside will be needed to at least drive home the fact that many areas of the market need to take a pause.

One way to think about some of more extended sectors and stocks of late is that they have just enjoyed a hearty five course meal over the past few weeks, when many traders had been betting that they would be in line at a soup kitchen begging for scraps. Now, after their feast, some might say that they ate too much and will be sick to their stomachs. However, another possible scenario is that those extended parts of the market merely need a good liqueur, such as sambuca, to help with digestion of the recent big gains.

Incidentally, that latter scenario would neatly fit into the idea I talked about on Sunday evening of a sector rotation in lieu of a broad market swoon. The technology sector continues to look a bit frothy here, while many names in the industrial/material/energy complex look ready to move higher after building mulit-month bases. I have been considering putting on a pairs trade, going long $QID (ultrashort $QQQQ), while making bullish bets on the aforementioned energy/materials sectors.

Regardless, we came awfully close to hitting 1150 on the S&P today, and if you will recall that price marked significant resistance back in January of this year. To blow through both 1131 and 1150 in a matter of days may very well be in the cards for the market this week, but I will take a pass on chasing that scenario…for now.

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MARKET WRAP UP 09/20/10

In his book, “The Winner Within,” legendary basketball coach Pat Riley describes a significant breakthrough as a positive thunderbolt. Riley includes some indications that a major breakthrough is about to happen include: feelings of frustration because of hard work not being rewarded with success, deep loneliness, a recognition that a core healing must take place, healthy introspection, and prior instances of “choking” when faced with similar challenges. When viewing Riley’s book through the lens of the stock market, today had all of the classic signs of a breakthrough.

First and foremost, the S&P 500 blasted through the key multi-month resistance level at 1131, to close up 1.52% to 1142. Breadth was impressive, as many stocks broke higher after the end of last week’s benign consolidation. The small cap index was by far the best performer today, as traders have embraced risk appetite in a convincing manner. As I discussed over the weekend, once we saw a move above 1131, many bears covered their shorts in the face of a break above an obvious resistance level that had held throughout the past several months.

Despite several measures indicating that we are becoming overbought, I believe we can continue to move higher in the coming days. Moves of the magnitude we have seen over the past several weeks often catch market players by surprise. After a grinding trading range since May, the market digested many of the bad headlines this summer without entering official bear market territory, as we never fell 20% from of the April highs. Not only have we seen leading stocks, such as $AAPL and $FCX, go parabolic over the past few weeks, but many other stocks are setting up behind them as well, building bases and breaking higher.

Indeed, the stage is set to test prior key levels, starting with 1150.

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MARKET WRAP UP 09/16/10

The market continued its pattern of showing glimpses of weakness throughout the trading session before staging a final hour rally, as the S&P 500 closed today down just 0.04% to 1124. At the same time, we have yet to come close to breaking the key 1131 resistance level on the S&P from earlier this summer. Thus, we are building a string of doji days of indecision at the top end of the multi-month trading range. After hours, I see that $RIMM, $ORCL and $TXN are ripping higher on the back of impressive earnings. If the gains hold into tomorrow morning, I would expect these names to provide the jet fuel for the market to at least entertain the idea of peeking its head above 1131.

However, trying to anticipate a true breakout at this point remains pure guesswork. Even if we do break 1131 tomorrow, I would be skeptical of it, at least initially, as it could easily be a trap to lure in eager bulls, just like we saw in late June. Because of the choppy trading these past few sessions, sentiment seems to have turned mixed, although it is most certainly more bullish than what we saw when the S&P was hovering at 1040 in late August. Throughout this correction since last April, cash has been king in many respects, and I believe that is the case now more than ever.

The late North Carolina State men’s basketball coach Jim Valvano made famous the phrase, “survive and advance” during the Wolfpack’s run through the single elimination tournament to win the 1983 National Championship. I believe that motto applies to this market as well. The idea is to survive this tough trading range, making as few mistakes as possible, in order to emerge intact and ready to profit from an easier market down the road.

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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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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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MARKET WRAP UP 09/13/10

Stocks turned in another steady move higher today, while the pullback that everyone wants to see is missing in action. With the S&P 500 closing up 1.11% to 1121, the midday selloff turned out to be a terrific intraday buying opportunity. Volume was nothing to speak of, while breadth was strong. Two of the weaker areas of late, the small caps and technology sector (namely the semiconductors) turned in impressive days, as they played catch up to the broad market. Moreover, the emerging markets ETF broke out above a multi-month symmetrical triangle today. If that breakout holds in the coming days, it will be tough to argue against the idea that global risk appetite is now back in vogue.

While many charts could use a healthy consolidation period, there appear to be too many traders either bearish, or desperately hoping for a pullback so they can load up longs, for it to imminently materialize. As he is prone to do, Mr. Market will do that which frustrates the greatest amount of traders. Ironically, the same traders who are aggressively shorting this move because it is an unconvincing low volume drift higher, are likely the same ones providing the jet fuel to propel it even further as they get squeezed like the fruit in a Jack LaLanne infomercial. One thing for sure in this market is that if you insist on aggressively shorting the move up to the top end of the multi-month trading range, you are going to need a bigger stop.

Looking at the updated daily charts of the leading indices and sectors, seen below, there is still more room for the bulls to take us higher before we break the upper limits of the multi-month trading range. Beyond that, even a marginal break above the range would not be out of the question. In situations like this, you can either choose to aggressively chase prices higher, you can fight the tape and boldly go short, or you can buttress your exposure to the market with an outsized cash position. I believe that the latter strategy is the correct way to go here. In essence, I am willing to play along with the melt-up, but will do so with an Exit Row seat, and one eye on the emergency brakes.

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