Turn the Straw Men on Tuesday

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Thus far this morning, we are not seeing a “Turnaround Tuesday,” so much as a bunch of market players arguing against straw men. To be sure, it has been a huge move over the past week, since last Tuesday’s stunning late-day bullish reversal. We have climbed nearly 125 points on the S&P 500 in that time, and now a good chunk of traders are positioned to benefit from a fast and furious roll over.

Instead of sharply faltering, though, the market is hanging tough and digesting the recent strong move in a benign manner. Underneath the surface, many banks are following-through to the upside after yesterday 5% move higher on the XLF, ETF for financials. Individual standouts in other sectors include ANR and CTXS, as well.

I am resisting the urge to short at this point, and I am instead focusing on stocks that appear to be firming up from the bevy of loose and sloppy patterns that had forced me to stay in heavy cash for most of the summer and this early autumn.The bulls still have plenty of work to do if they are going to break us up and out of the multi-month range on the S&P 500, but the first task is to prevent a massive roll over after the recent rally. Looking at the 30-minute chart below, there is nothing that compels me to be short here. As you can see over the past week, we have a steady uptrend going on this timeframe. That can change quickly, but so far the bulls are doing their part. In fact, holding the line here would, indeed, render those who are aggressively short to be “straw-less.”

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It is often convenient to dismiss any constructive price action in the more defensive areas of the market with the blanket statement of it being simply “investors chasing yield,” or “fleeing to safety.” In reality, though, not all high yielding, traditional safe havens of the market perform in unison. Recently, the utilities have been more impressive than the general consumer staple ETF, XLP. Actually, to drive a point home, even in the tobacco space stock picker’s who selected LO MO and RAI have seen a much better performance than those who picked PM. So, brushing aside all high yielding defensives as being in the same boat usually just illuminates a lack of effort and focus.

Currently, the utes are running and threatening a major breakout on the weekly chart. You are talking about a possible perfect trifecta of tailwinds, in terms of consolidation in the industry, favorable valuation, and attractive, relatively safe yields. Note the ascending triangle on the weekly chart below of the XLU, as well as D and ED as some of the best performing utes.

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Direct Vimeo Link Click Here

 

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We are in the familiar scenario over the past few months of a huge gap at the open, followed by the market going nowhere for most of the session, concluding with possible final hour fireworks. While the jury is still out on today’s close, the first two elements of that scenario have most certainly been fulfilled today, as you can see on the 5-minute chart of the SPY below. I still maintain that trying to actively trade this type of a market is a mistake, given the randomness of the price action, followed by traders who succumb to the multiple traps abound.

Specifically, those “traps” refer to traders chasing moves at the open, only to find out that had already missed the move, in either direction. This type of a market is seemingly designed to harshly punish those traders trying to compensate for a move they just missed by chasing it aggressively. Remember that if this truly is the formation of an intermediate-term bottom, then by definition we will have plenty of time to play along for the ride. However, entry points do matter, and so do odds and probabilities. The idea is to trade with an edge, not to just trade because the market looks good on paper with impressively green statistics. I am seeing some decent progress by the bulls, but as I wrote last evening there is more heavy lifting to be done before I am going to start betting heavily again.

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[youtube:http://www.youtube.com/watch?v=b7JpxavO9NE&feature=related 550 412]

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After a jaw-dropping move from $17 to $304 per share in less than three years, it is no wonder that Netflix bulls are slow to accept the sudden but potent change in character that the stock is exhibiting. The temptation is to pick the big bottom here, but even after dropping two-hundred points over the past ten weeks, there seem to be more traders looking to go long than short. That type of psychology tells me that the changes in the stock’s attitude and latitude have yet to come close to being fully accepted, which I would say is a perquisite for forming a major bottom. While Netflix can, and most likely will, see a knee-jerk rally in the near future, the risk/reward profile is, and has proven to be, unfavorable given the menacing threat of swift further downside.

As Jimmy Buffett sang in his famous song, “If we couldn’t laugh/We would all go insane.” Instead of going crazy trying to pick the bottom in Netflix, you are probably better laughing it off and waiting for a better spot, when the changes in attitudes and latitudes are better respected.

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Here is a pretty impressive breakout on the daily chart of Exxon Mobil. The energy stocks are leading the broad market charge higher today, but most of them do not have the type of clean, textbook breakout like Exxon does. However, if you believe that Exxon is foreshadowing what is to come for energy stocks, then you have to grow increasingly bullish here, since the presumption is that the others will firm up. Note the two month resistance trend line being breached today. True, volume is light with major holidays here and in Canada, but price is what pays.

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