Caution: Low Overhead Clearance

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With both The PPT and the McClellan Oscillator signaling short term very overbought conditions, in addition to the prospect of a parabolic move higher from the failed head and shoulders top–think July 2009– this market is presenting us with an interesting situation. On the one hand, it seems as though the consensus view is to either move to all cash, or put on some shorts here. Therefore, it follows that the contrarian play would be to press longs here, typifying the pain trade.

On the other hand, betting on a parabolic move higher again from the failed head and shoulders does not offer a favorable risk/reward profile, in my view. The daily charts of the broad indices indicate that we have retraced the move back to the “scene of the crime,” where we rolled over and headed straight down, starting on June 21st of this year. Basic psychology dictates that the concept of overhead supply is likely to cause a period of consolidation, at a minimum. Many of the longs who bought or added in mid to late June, thinking the correction was over, have endured a wild ride down. They are more likely to sell than to hold or buy more, when they are finally close to being made whole again.

To illustrate the intraday volume, I am including an up to date chart of the $SPY. See my notes on the chart below.

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MARKET WRAP UP 07/26/10

In just a few short weeks of summer trading, the bulls have rejected the breakdown below the key 1040 level on the S&P 500, and have now pushed us up towards the top of our multi month trading range. Not only have the bulls recaptured the 20 and 50 day simple moving averages, but we also closed slightly above the 200 day moving average today as well. Breadth was strong, while volume was weaker than Friday’s positive close. With the S&P closing today’s session up 1.12% to 1115, the key issue going forward is whether the bears will soon arrive to prevent a true breakout, and push us back down into the broad trading range.

As the updated and annotated daily chart of the S&P 500 illustrates below, we are pushing the upper limits of the price action that we have seen since May 20th of this year.

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Turning to other key indices and sectors, it remains bullish to see technology, small caps, the transportation stocks, as well as the emerging markets leading the charge higher. All four of those areas showed relative strength throughout the correction, and are now outperforming to the upside, as their updated daily charts illustrate below.

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Going forward, my strategy is to lock in more profits (as I detailed today in earlier posts), should we continue a melt up of sorts. Despite the vast change in sentiment amongst traders in the past few weeks, from wildly bearish to bullish, my inclination is to keep buying the dips and selling/shorting the rips, holding an overweight cash position to boot. Should the market continue with a definite breakout in the coming weeks, I have no bias preventing me from quickly reverting back to my bread and butter strategy of aggressively swing trading in a trending market.

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TOTAL PORTFOLIO:

EQUITIES: 26%

• LONG: 26% ($ARUN $BX $SAPE $POWR $JMBA)

CASH: 74%

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Locking in some profits here. You may want to check back for updates. I sold out of $NTAP, and sold 1/2 of $SAPE.

All trades are timestamped inside The PPT.

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TOTAL PORTFOLIO:

EQUITIES: 26%

• LONG: 26% ($ARUN $BX $SAPE $POWR $JMBA)

CASH: 74%

The issue of when to sell a winner is a good dilemma for a trader to have. From a theoretical standpoint, there would be nothing wrong with letting your winners run within the broad context of a trending bull market, in order to buttress your trading prowess. Seeing as the current broad market has been resilient in terms of moving higher in the face of mixed earnings and headline risks, I am encouraged by what I see. However, I am not prepared, just yet, to declare that a brand new bull run has commenced.

Thus, I am still inclined to have a quick trigger finger. I have not sold out of them yet, but when I see that some of my holdings are up five days in a row, I have little interest in being cute here, by letting them run forever.

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For quite some time now, legendary investor Jim Rogers has implored able bodied people to become farmers. In accordance with his long term thesis of Greenspan/Bernanke inspired inflation, “Jimmy the Bow Tie” believes that commodity prices are going much higher in the long run. While he believes in investing in the underlying commodities as opposed to the industry related stocks, I believe that the securities of firms dealing in commodities are going to see a sharp run up as well, should his convictions become reality.

However, the inflationary run up that we saw in early 2008 turned out to be a head fake, setting us up for a deflationary crash. In particular, the stocks of the agricultural and soft commodity names that were flying high in the first two quarters of 2008 not only horrifically crashed along with the rest of the market, but have been notable underperformers ever since. In front of this most recent broad market correction, they were among the first sectors to roll over. It is only in the past few weeks that they have shown some signs of life.

Should the ag names get going again to the upside, I expect them to attract a lot of hot money and momentum. I agree with Marc Faber that the nature of the very easy monetary policies of our central bank, as well as those around the world, is likely to inspire sustained periods of volatility, where the markets alternate between reflecting sharp periods of deflationary versus inflationary expectations.

The purpose of this post is to alert you to the potential bearish to bullish reversals that I am seeing in the ag related names. Interestingly, while some are hitting multi year highs ($DE), others have been left for dead for many months now ($MON, $POT, $MOS), and are only now reminding investors that they are still in business.

See my notes on the charts below, as I extrapolate on the idea of bearish to bullish reversals. The first one is the monthly of $DBA, the soft commodity ETF, illustrating how much they have underperformed the broad market since mid 2008.

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MARKET WRAP UP 07/23/10

The bulls closed out a solid week in impressive fashion, as the S&P 500 finished up 0.82% to 1102. The sentiment of traders has quickly changed back to an eager tone, as market players witnessed various stocks and sectors hold their breakouts this week. As far as declaring the end of the broad market correction that commenced in late April, there remains much work yet to be done. As we near overbought levels, the bears are highly likely to take a stand next week, in the face of any further upside. The amount of technical damage that has been inflicted on the charts in the past few months will cause overhead supply to become an issue, regarding trapped bulls who are now close to being made whole again.

The updated and annotated daily chart of the S&P 500, seen below, should illustrate the big picture issue facing the bulls. Despite the impressive victory in this week’s battle, the war is far from over. We are only now nearing the upper resistance trend line of the broad, multi month trading channel. Nonetheless, the bulls made significant progress over the past few weeks in recapturing–and holding– the crucial 1040-1050 zone. The prospect that the market has made a higher low is now a distinct possibility.
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Undoubtedly, what would make the bulls even more sanguine are the daily charts of the Nasdaq, Russell 2000 (small caps), Dow Jones Transportation Index, and Emerging Markets. All of those dailies indicate a breakout. Whether or not it holds next week will be crucial. Even if sustained upside does not come, a lateral base above the breakout area would be bullish as well (see charts below).

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Should this upside move prove to be legitimate, then we will see more and more charts of individual issues begin to set up. Those of you following my trades know that I have had more of an itchy trigger finger than usual in terms of taking profits in this type of market. Beyond that, cash is still my largest position.

If, indeed, we are seeing the beginning stages of a sustained uptrend, then by definition there will be time for me to become more aggressive. To restate one of my basic trading tenets, I am most aggressive when I see an established trend, in the middle 80% of the move. Whether or not I miss out on some profits in the initial or final 10% is irrelevant to me. Aggression is great, but selective aggression is what gets the money over the long haul.

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TOTAL PORTFOLIO:

EQUITIES: 34%

• LONG: 34% ($ARUN $BX $NTAP $SAPE $POWR $JMBA)

CASH: 66%