Back in 2007, the four horsemen leading the tech charge higher as we formed a multi year top were: $AAPL, $GOOG, $RIMM and $AMZN. In recent months, $GOOG and $RIMM have fallen behind in certain areas, and their stocks have been weak for quite some time now. $AAPL and $AMZN, on the other hand, have been dominant.

One of the interesting things about the mass psychology in the market happens when we see a broad market bullish to bearish reversal.  Fund managers and traders look for whatever long plays that are holding up relatively well, and they pile in while the walls around them cave in.  Interestingly, when the relative outperformers/last bastions of safety finally start to roll over, that is a sign that we are– at the very least–at the beginning of the end of the correction.  Recall in late 2008/early 2009 when plays like $WMT and $XOM rolled over, after having been very good outperformers. Corrective/bear markets eventually get to everything. There are no sacred cows, especially in those places where a large amount of market players think they can safely hide as the market slides.

In the current market, both $AAPL and $AMZN have been hanging tough since the broad market started to fall apart in late April.  Both of their respective daily charts, seen below, tell the story of them starting to break down.  While there is a sort of taboo about shorting these two stellar businesses, if you are looking to be aggressive, then now would be the time to short them on further market weakness.

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Days like today bring out the real biases in many market players. Within the context of a sharp downtrend, we saw a fierce selloff last Friday and Monday, only to stage a late day rally yesterday.  Today, we are solidly up 1% across the board.  The steadfast bears are pounding the table, calling this a fool’s rally that will soon fall apart. On the other hand, the perma bulls are out in full force, declaring this the true bottom.  Needless to say, there is a lot of emotion in the air.

What I find has worked best for me in these kinds of situations is to block out all of the noise, and look at the facts. We are still in a steep downtrend and have done lots of technical damage on most charts. However, we did become oversold, and as I noted a few days ago, a bounce was to be expected.  To me, the crux of the issue is determining how sustainable the rally is.

I am looking for continued buying on strong volume, which should help to firm up damaged charts (on a daily time frame) across the board. That metamorphosis takes an awful lot of heavy lifting, and the institutions are the ones with the resources to do so. Moreover, the nature of a sustainable uptrend is that you will be able to spot good entry points, based on an occasional low volume, orderly pullback.

Of course, none of this could materialize, and we could easily roll back over and make new lows. So, although I am sacrificing the rewards that come with precisely timing an inflection point, I am negating the substantial risks that are associated with picking bottoms.

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At the poker table, if you can pick up a “tell” on another player, you will be privy to information that can give you a greater edge in your decision making process.  Suppose that you are holding a good, but not great hand. You are against only one other player in the hand. You had been playing with this particular player for several hours.  You notice that when he has a weak hand, he does not mind joking around in a casual conversation with the players around him during the hand.  However, when he was a really great hand, he becomes very serious, and blows off any small talk because he is focused on the action at hand.  You can now use this information to form a more focused and cogent analysis before making a decision.

The same strategy holds true in the stock market.  If you can isolate a few corners of the market that have been giving off tells as to the next big move of the broad indices, you will be working smarter.  While hard work is necessary, it is not sufficient to crushing the market. You need to have a laser-like analysis, in terms formulating your strategy.  Be precise!

Thus, I will offer my two best tells for the current market.  The first one is $FCX, a stock I have talked a lot about recently. We know that they are a well run mega cap copper, gold and molybdenum miner.  Despite the recent “death cross” on the chart, the stock was THE tell today, as it was up the whole day, well before the broad market decided to turn green in the final hour. Pay attention to my commentary on the chart, seen below.

My second tell is the Japanese Yen.  While everyone is watching the Euro, do not forget that the Yen carry trade has been the premier vehicle for much of the risk appetite we have seen for many years now.  The Yen has had an inverse relationship to the performance of risky assets. Oh, and for all of you “flash crash” deniers out there, look at what happened to the Yen on May 6th of this year, and you can go shove your fat finger up a pencil sharpener.

MIND YOUR TELLS!

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Can’t help themselves the whole way down, baby….

[youtube:http://www.youtube.com/watch?v=u0PUrNwvvBk 450 300]

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On the back of two ugly down days, the S&P 500 is up a few points headed into the afternoon.  The Nasdaq is lagging, and is actually down 0.80% at the time of this writing.  Days like today illicit a very dangerous emotion from traders—HOPE.  Hope may work very well on the political campaign trail, but in the stock market, trading based on hope is one of the oldest sucker moves around.  It is often said that bull markets climb a wall of worry, while bear markets slide down a slope of hope.

We could easily rally a few days from here, as we are short term oversold. So, adding short positions at this point is probably not correct. However, the very nature of a countertrend rally is that it is short lived, regardless of how exuberant it may seem.  The great thing about the stock market is that, unlike in baseball, there are no called strikes, to quote Warren Buffett.  If you believe, as I do right now, that the risk/reward profile of putting cash to work is unfavorable, then your best move is to patiently wait for a better pitch.

As you know, I have been watching $FCX as my tell for the broad market.  It is up nicely today, over 4%. However, if you look at the daily chart, you will see that it is way too early to declare any kind of inflection point.  What you want to see is a few more days of price stabilization combined with heavy buying volume.

I know that this kind of market, as well the cautious nature of my posts, can be frustrating for many of you who are growing impatient. All I can tell you is that as soon as we find ourselves in a healthier market, I will be eager to post as many favorable setups as I can.  Conversely, should we get a multi-day low volume bounce from here, I will look at the short side should we break down again.

[youtube:http://www.youtube.com/watch?v=eKsXQq02dsw&feature=related 450 300]

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…on making your brokerage rich via copious amounts of commissions from your overtrading.

This kind of market does not just wipe out stubborn bulls who buy stocks the whole way down, it also punishes habitual bottom pickers, and basically everyone except the most talented of daytraders. Eventually, we will form a tradable bottom.  When that comes is anyone’s guess, and is out of my control. What I CAN control, however, is not making low probability trades out of boredom while the market remains unhealthy.  On the back of last Friday’s distribution day, the bulls have to overcome a heavy burden of proof to get me enticed on the long side anytime soon. I am willing to change my mind at a moment’s notice, but I need to see the evidence first via accumulation and healthier setups across the board.

Finally, I urge you to continue to monitor $FCX as a broad market tell.  It continues to weaken and has yet to see any kind of a bid.  Watch it closely to see if that changes.

If you are having problems sitting tight, go get some discipline at basic training for Marines:
(Warning on the video for all of you thin skinned types)

[youtube:http://www.youtube.com/watch?v=yyC0BmTYTgI&feature=related 450 300]

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