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MARKET WRAP UP 06/29/10

Days like today illustrate the phenomenon of when a great many market participants hone in on a key technical level. With talking heads on financial television (who usually gloss over technical analysis) speaking in earnest about head and shoulders topping patterns, as well as the all important 1040 level on the S&P 500, it is no wonder the market revisited that level in a hurry today. Keep in mind that we closed yesterday at 1074, and even opened today at 1071. However, that 1040 zone acted like a price magnet, with all eyes fixated to it. I always find it humorous to see ardent fundamental investors, who prefer macro and micro data to price action and volume, all of a sudden become enamored with a certain technical level.

With the S&P closing down 3.10% to 1041, the veracity of the lower end of our recent trading channel is being challenged. As the updated and annotated daily chart of the S&P 500 shows, the channel is widening out. This reflects the sharp disagreement between bulls and bears concerning the value of equities. The last time we saw this pattern was when we topped out in late April. I was much more apt to call that pattern a bearish “megaphone” top because it took place after a sharp run up from February, whereas this pattern formed after a sharp correction. Either way, however, the pattern is neutral at best. Sloppy and choppy patterns with wild price swings are all friends of the bears. (See chart below)

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With the arrival of the end of the quarter, combined with the long July 4th holiday weekend, history favors a bounce in the next day or two. Despite that possibility, I moved back to 100% cash within the first hour of trading this morning in order to try to take some quick profits on my hedges, and to avoid any further pain from my longs. While we are certainly becoming oversold, we can easily see another bout of heavy selling tomorrow in order to shake out the complacent dip buyers who automatically assume that 1040 will hold as support. One possibility is a final push down to the lows of Halloween from last year, at 1029. There are also the late September 2009 lows of 1019.

Above all else, the way this market is unfolding, I believe that there are two main strategies for non-daytraders. The first strategy is to simply sit in 100% cash until the market heals itself and becomes constructive again. There is no way of knowing how long that will take to happen. The second strategy is to try to buy sharp dips, such as the one we are experiencing now, and then to quickly take profits into any 2-3 day bounce. After that, you would look to put on some short exposure for the next leg down, presumably playing a broad trading range, with a bearish bias. Of course, that strategy carries the risk of assuming any kind of range will hold.

The bottom line is that we are seeing sloppy charts across the board, in key stocks, ETFs and indices. If you want to trade these moves, being nimble and being correct are essential, as losses will tend to be exaggerated by the size of the swings.

NOTE: The PPT is absolutely perfect for times like these. The Fly posted a screen today inside, for distinguished members, which lists stocks and ETFs that are technically oversold, using a variety of factors, e.g. accumulation/distribution and volume. But The PPT does not stop there. This particular screen then shows how each stock or ETF performed historically, in the days immediately following when they had been previously deemed technically oversold by The PPT algorithm. Thus, you can actually quantify the best ways to play oversold conditions. It is an exceptionally useful tool that will save you lots of time, and will help you to bank loads of coin.

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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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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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MARKET WRAP UP 06/23/10

After a morning gap down to 1085, the S&P 500 chopped and flopped slightly higher the rest of the day to close down 0.30% to 1092. On days when the Federal Reserve makes an announcement, the market usually sees violent price swings after it is released. While we certainly saw some volatility today, the overall action was quite tame compared to what we have seen the past few days. In addition, the broad market volume today was again meek relative to the past few weeks, showing a lack of conviction by market participants.

Thus, the market is still stuck in a trading range, and is attempting to chop up as many traders as it can. As the updated and annotated daily chart of the S&P 500 illustrates, the market found support in its morning gap down at the 20 day moving average, as well as the resistance trend line dating back to April (see below).

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As you can see, the competing forces of the downsloping 50 day moving average, yet rising 20 day moving average, are clearly at play here. Eventually, we are working towards a resolution of these conflicting reference points. However, being patient and holding hedges–as well as high levels of cash– are my best ideas until the moment of truth arrives.

While it is encouraging to see that the prior resistance trend line on the S&P turned into support today, it simply is way too early to bet that we go straight up from there. However, it is worth noting that the historically leading transportation stocks also have found temporary support at the prior resistance line (see below).

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Finally, I made no changes to my portfolio today. I was pleased to see every position in the green, save $GMXR. Ironically, I think $GMXR has by far the most upside out of any stock in my portfolio. I will be patient with this one, so long as the volume pattern and bottoming out process remain in tact.

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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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[youtube:http://www.youtube.com/watch?v=MeWC59FJqGc 450 300]

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MARKET WRAP UP 06/22/10

After yesterday’s bearish reversal, today featured an initially flat market that eventually gave way to a late day selloff. With the S&P 500 closing down 1.61% to 1095, any sense of complacency by market participants was replaced with fear of further downside after losing the 200 day moving average. Moreover, the market also closed under the psychologically significant 1100 level.

With that said, today was not a high volume selling affair when compared to that which accompanied each thrust down that we saw in May and earlier this month. Further, after the market’s huge run up from 1042 to 1131, to retrace half of that would not be unheard of.

As the updated and annotated daily chart of the S&P 500 illustrates, despite losing the 200 day moving average today, the 20 day moving average is sloping up and could easily be a place where buyer’s step in (see below).

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Incidentally, the pink resistance line that we broke out of last week is right where the 20 day moving average is, and a retest of that area is likely to be the next battleground area. Moreover, to find support around these levels would put in a nice inverted head and shoulders bottom on the daily chart of the S&P. Strategically, I am trying to balance out my portfolio with the competing bearish and bullish arguments. While operating below a downsloping 50 day moving average is certainly bearish, we cannot discount a rising 20 day moving average.

Thus, I continue to be hedged in my portfolio, with a large cash position. Despite my gut feeling that the selling over the past two days was a mere shakeout, I will respect my stop losses and be properly hedged. Trading based on hope is not part of my strategy.

As noted earlier here and in The PPT, I made some changed to my portfolio.

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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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MARKET WRAP UP 06/21/10

The futures roared into the opening bell this morning, on the back of the weekend news out of the Chinese central bank that they will ease their currency’s peg to the U.S. dollar. Just after 10 a.m. EST., the S&P 500 hit its intraday high of 1131. From that point on, the market slowly dripped down into the close, to finish off 0.39% at 1113. Needless to say, intraday gains in many individual issues were wiped out as well, as overeager traders who bought during the first hour were trapped and drowning without a life vest.

As ugly as the action seemed to the bulls, it was not entirely unexpected. Seeing as we hit 1042 on the S&P thirteen days ago, we have come a long way in a short period of time, considering we touched 1131 today. While many frustrated traders were eager to call a market top based on today’s action, the updated and annotated daily chart of the S&P 500 illustrates that we are still battling just above the 200 day moving average (see below).

It is also worth noting that today was not a high volume day, which supports my belief that this is likely not a huge reversal day. From a technical standpoint, a shallow, light volume pullback from here to around the 1100 level would offer some excellent entry points to some of the best looking charts, such as $DECK, $LULU, $CMG, $VMW. Some more consolidation would also give other charts a chance to firm up some more, making them more viable long candidates.

The key point is to continue to be patient with a high cash position, and to not let your emotions get the best of you during these intraday whipsaws. To put it simply: the fight is on right now between the bulls and bears. Eventually, this range will be resolved sharply one way or the other. As we have broken out of the descending resistance trend line (see chart above), the bulls still have the short term upper hand. However, the bears retain the intermediate term edge with a downsloping 50 day moving average.

I cannot emphasize enough the significance of patience in my trading strategy. If we are, indeed, in the process of forming a sustained uptrend, then by definition there will be plenty of entry points. Until that materializes, let other market participants do the heavy lifting for you, before diving in with aggressive bets. As an example, if you had patiently sat out the late January/early February correction, you could then have put out some small long positions in late February. The correct time to become very aggressive on the long side was not until early March, and even then you would have had a full month and a half of easy gains before we topped out!

While my style may not be the sexiest, very selective aggression is what gets the money over the long run and, to me, that is as sexy as it gets.

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TOTAL PORTFOLIO:

EQUITIES (Including ETF instruments):38%

• LONG: 32% ($APKT $LULU $CRM $GMXR $ISH $DECK $THOR)
• SHORT/HEDGED: 6% ($TLT $TZA)

CASH: 62%

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