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MARKET WRAP UP 09/14/10
The above painting illustrates a common motif in Russian folklore, where the hero knight comes to a fork in the road and sees a standing stone with the inscription: “If you ride to the left, you will lose your horse. If you ride to the right, you will lose your head.” Our current stock market reacted as if it were at a fork in the road today, as we saw indecisive doji action across all of the major indices and sectors. With the bears nudging the S&P 500 down 0.07% to close at 1121, we are still drifting at the upper end of our multi-month trading range. Volume remains uninspiring, while breadth was mixed, with the financials notably lagging.
The precise issue concerning the current market is whether there are too many traders actively seeking resistance to kick in for it to actually happen. It is often said that when everyone thinks the same way, no one is thinking. If, indeed, it is the case that the majority of market players are either flat-out bearish or underinvested bulls hoping for a pullback, then the probability of the selloff occurring drops significantly. Of course, with the VIX closing near multi-month lows, it is also a distinct possibility that the “keep it simple, stupid” approach to trading will work like a charm, and we will sink back into the broad range in the face of complacency.
Thus, my cash position continues to be large and in charge, buttressing my portfolio in the face of market uncertainty. While I am reticent to describe this market as being in a sustainable uptrend, I am keeping an open mind to the possibility that we are transitioning from an oscillating market into a trending one. The nature of a trading range over a period of time lends itself to being a far more difficult market to trade than a trending one, regardless if the trend is up or down. At a certain point, it will be strategically correct to become more aggressive with my portfolio allocation.
For now, though, the daily charts of the leading indices and sectors, seen below, are telling me to respect the high level of risk of a major move in either direction.
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