First Time, Long Time

The action thus far today has been a pretty good example of when a stock market phenomenon becomes too obvious to continue. There has been much hoopla about how bullish the first day of each month has been, and when we ramped up to 1332 on the S&P 500 first thing this morning, the temptation was to assume that the bulls would deliver another grand slam. However, we have not only given back this morning’s gains, but most of yesterday’s as well. The lesson is that whenever something in the market appears to be a sure thing, it usually is too good to be true.

On the one hand, we are still well above last week’s lows and could easily be consolidating here before moving average. Indeed, I would be looking for a few days of quiet action after today in order to set charts back up for some actionable long swings. On the other hand, we are seeing some of those bear flags that I wrote about last night weaken, such as BIDU FCX. However, shorting bear flags in an overall uptrend is often a trap that bears fall into more than they care to admit.

The bottom line is that since last week we have gone straight down and then back up in a “V,” and this usually leads to many sloppy charts underneath the surface. So long as the bulls can provide an underlying bid to this market, we could finally see more than just a few select charts set up for enticing longs again, after a few days of consolidation after today. I am looking to see which side shows more initiative here, with the bulls eyeing today’s highs of 1332, while bears are targeting last week’s lows of 1294 on the S&P.

The market gapped up higher this morning, despite notable weakness in many of the high growth names found in the Nasdaq Composite Index. As a result, the Dow Jones Industrial Average at one point this morning was screaming higher up 100 points, while the Nasdaq has been more or less flat, and is in the red at the time of this writing.

Looking underneath the surface, we have some small caps making nice intraday moves. At the same time, the very narrow pockets of momentum make it difficult to get very aggressive on the long side, as momentum leaders like BIDU CMG CRM NFLX are all firmly in the red. Just because there are not a bevy of attractive longs, though, does not necessarily mean it is correct to start looking for shorts just yet. As I discussed over the weekend, we could easily be experiencing another one of those low volume “V-shaped” squeezes to new highs.

Hence, a much more selective than usual approach is still advised. A neutral/cautious stance is not the most fun way to trade, but when the market is offering up unfavorable risk/reward setups, I am content to focus on protecting capital above all else. I am playing a few longs, but you can be sure that if we see a failed bounce I’ll be quick to hit the exits.