Cautious Pessimism

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MARKET WRAP UP 09/02/10

If I had to most precisely isolate the overarching sentiment of traders, it would best be described as cautious pessimism. By now, the secular headwinds facing the economy are well known. When these macro issues are combined with the sharp correction that we saw in equities in May, followed by the past three months of choppy, amorphous price action, it is no wonder that most market players are expecting, at best, a continued sideways market.

With the prevailing belief being that we are either going down or sideways, in addition to the fact that we held the lower end of the trading range this week, I am still in the camp that says it is correct to have a hearty risk appetite at this point in time. If we move above 1120 or so, then I will likely become more cautious again (as many others will presumably become more and more bullish). Normally, my preferred style is to not be much of a contrarian, as I want to ride established trends. However, as I noted several months ago, I was either going to have to adjust to this market, or sit out entirely. Given the fact that this broad trading range can continue much longer than anyone thinks possible, I decided to adjust.

As for today, the bulls impressed with solid follow through on yesterday’s massive rally. With the S&P 500 closing up 0.91% to 1090, the bulls recaptured both the 20 and 50 day simple moving averages, as the updated and annotated daily chart illustrates below.

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Updating the daily charts of other key indices and sectors, we likewise saw sound follow through from yesterday’s rally. This follow through helps to reinforce the possibility that a series of double bottoms and inverted head and shoulders have been formed.

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After trend traders dominated in 2008 (down) and 2009 (up), my working thesis for 2010 is that those trend traders need to be humbled. The nature of a secular bear market, which I believe we have been in since 2000, is that all excesses are washed out, not just in the economy at large but also in the market. When we tested 1040 a few days ago, many traders mistakenly assumed the downtrend would persist. Instead, we are seeing that 2010 is shaping up to be the year of the range trader.

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[youtube:http://www.youtube.com/watch?v=H3QEKT2mk_Q&ob=av3e 450 300]r

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With so many people cautious in front of the jobs number tomorrow, combined with the natural doubters of this rally, I am comfortable taking on more risk here. I sold out of my final 1/2 position in $CCI, and took off 1/2 of my full position in $HMIN to make room for the more high beta short squeeze play, $RBCN. I bought a full position in the name. I found the name in one of The PPT short squeeze screens, as the stock has a 48% short interest.

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TOTAL PORTFOLIO:

EQUITIES: 66%

• LONG: 66% ($CTRP $CTXS $CMG $NTCT $RBCN $AAP $MELI $HMIN $RDWR $CMI)

CASH: 34%

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I bought a 3/4 position in $CTRP. I am playing it for a multi-month continued breakout from the apex of the symmetrical triangle.

All trades are timestamped inside The PPT.

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TOTAL PORTFOLIO:

EQUITIES: 66%

• LONG: 66% ($CTRP $CTXS $CMG $NTCT $CCI $AAP $MELI $HMIN $RDWR $CMI)

CASH: 34%

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One of my holdings, $NTCT, is hitting decade highs today, at $17. I am a firm believer that price has memory, and for this stock to overcome multi-year resistance, especially given the broad market conditions for the past few months, is an undeniable sign of strength.

The monthly and quarterly charts shows a nice green candle above multi-year resistance.

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Finally, the daily chart shows a thee large consecutive green candles, pretty darn close to the “three white soldiers” candlestick pattern which is a very bullish pattern after the stock’s recent consolidation. Keep in mind $NTCT is a relatively thin stock. Apart from that, I expect much higher prices from here.

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MARKET WRAP UP 09/01/10

With the stage set for a significant breakdown headed into a seasonally bearish period for the markets, the S&P 500 naturally rallied 2.95% to finish at 1080. Breadth was the strongest that we have seen in at least several weeks, while volume was surprising potent. Regardless if we continue to move in a straight line higher from here, or if we consolidate for a few days, the bottom end of the multi-month trading range has once again proven to have been a sound buying opportunity in the face of pervasive negative sentiment. With many traders complacently assuming that the market had started a fresh downtrend, the price action today reminds us that we have been in an oscillating market, rather than a trending one, for at least the past three months. Until we see a convincing break–and hold–of the range, it lives on.

As the updated and annotated daily chart of the S&P 500 indicates below, we have quickly rallied up to the 20 and 50 day moving averages on very strong volume. A break of those moving averages leaves us with a nice vacuum to fill above.

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Turning to other key indices and sectors, the common theme is that of powerful buying at crucial support levels.

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After several weeks of seeing any bounce, whatsoever, aggressively faded, the rally today had impressive staying power. Do not discount this change in sentiment going forward. While many will look to reload shorts in the next day or two, this rally could easily last longer than anyone thinks possible. For the past few days, the market has been looking for an excuse to rally. Off of economic data last night and this morning, we found those excuses. Going forward, if risk appetite remains healthy, I expect that change in sentiment to trump all economic data, good or bad.

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[youtube:http://www.youtube.com/watch?v=QR4Y6Ll0DwA&a=GxdCwVVULXcOXl33RxUOaQ3vM3IrhPiv&playnext=1 450 300]r

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I made several trades today:

• I sold out of $APKT.
• I sold 1/2 of my $CCI posiiton.
• I bought a 3/4 position in $CTXS.
• I bought a 1/2 position in $CMG.

All trades are timestamped inside The PPT.

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TOTAL PORTFOLIO:

EQUITIES: 60%

• LONG: 60% ($CTXS $CMG $NTCT $CCI $AAP $MELI $HMIN $RDWR $CMI)

CASH: 40%

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