Jun 292012
 

S&P500 daily @ 11:58 EDT

Markets popped on news out of Europe.  The union is adopting a softer stance on austerity measures and now allowing bailout loans to go directly to ailing banks instead of through each nation’s central bank.  This prevents additional debt from being laid on each nation’s current obligations and pressuring their creditworthiness.

Is this a real fix, or just another temporary patch job?  I’m not an economist, but it doesn’t sound like a real fix and Europe will continue to muddle through this for a good while longer.  But it is a step in the right direction and shows a hint of flexibility coming from Germany.

The markets popped above their 50dmas in the opening gap up.  Not a good day to be short and no doubt a good chunk of the buying is shorts getting run out of the market.  The interesting thing to watch is if there is follow-on buying on this news or if big money continues to be reluctant to commit more capital to this uncertain market.  If these price gains and volume hold up, today will be a follow-through-day and we’ll move back into market in confirmed uptrend.  This will be the 3rd change in IBD’s market outlook in two weeks.  It is hard to imagine how such extreme volatility can be bullish.  The next technical level on the upside will be breaking through June 19th’s high of 1363.

It will be interesting to see if this newly found euphoria is sustainable or not.  Pullbacks and bases usually demoralize traders as they grind up both bears and bulls with all the false breakouts and reversals.  This volatility wears out traders before clearing the way for the next directional move.  Last year we traded sideways in a choppy fashion for 5 months before the strong uptrend kicked off.   We’re currently 2 months into this base.  Personally I think the market needs more time to fully demoralize traders before it will be poised to make its next move.

I closed my short position for a small loss this morning.  It’s not that I believe in this move higher, but I’m just being defensive and exercising risk management to protect my portfolio.  I’m ready to jump back in on the short side if I see any weakness in the market.  This is the best aspects of being a small trader, I can move in and out of the market with ease.  This is the only edge we have over big money managers and if we fail to take advantage of it, we are giving up the only advantage we have in this game. But this can be a double-edged sword and it will bite us in the butt if we over-think and over-trade every little blip in the markets. There is a fine line between being prudently defensive and being reactionary.

Stay safe

 Posted by at 12:37 pm on June 29, 2012
Jun 282012
 

S&P500 daily @ 12:35 EDT

The Supreme Court blindsided the markets by upholding the individual mandate and mostly keeping Obamacare intact.   This was probably the least expected outcome given the tough questions many justices were asking during oral arguments.  But this might not be all bad for the markets because this is a definitive resolution to Obamacare and virtually eliminates all uncertainty by ending the health care debate.  The market now knows what the rules are and can move past this issue.  The markets deal with bad news far better than uncertainty, so this is most likely better for the markets than reopening the health care debate.

The markets opened lower on Euro concerns and then plunged on the Court’s ruling.  But after a sharp sell-off, the markets recovered a good chunk of the Supreme Court’s plunge and is getting back to the early morning’s levels.

It is less clear on where the market is headed because we are in the middle of the previous rally’s range.  At this point we could go either way since sentiment is fairly balanced.  I still expect the market will continue lower, but it really is a coin-flip.  The last few days shook out a lot of shorts that piled in on Monday’s sharp sell-off.  We’ll see if Tuesday and Wednesday were part of a reversal higher, or simply a head-fake to shake out momentum traders.  We’ve already given back all of Wednesday’s gains and half of Tuesday.  Another few points lower and we’ll be making new lows.

Some of the biggest movers are obviously health care stocks.  But the ruling has different implications for different sectors depending on if they were helped by or hurt by Obamacare.  Insurance companies are down, but hospitals and other healthcare providers are up because they benefit from the larger pool of insured.

Stay safe

 Posted by at 12:40 pm on June 28, 2012
Jun 272012
 

Markets are up nearly 1% at mid-day, a strong continuation of yesterday’s rally.  The interesting thing is this recent rally broke from the strong correlation of USD up, equities down.  This relationship has been rock-solid over the last couple years and seeing this divergence is extremely noteworthy.  There seems to be very little in the way of news to drive this rally, so what gives?

If I had to guess, a chunk of the market thinks it is being sneaky and acting on unique insight the market will rally tomorrow after the Supreme Court tosses out pieces of Obamacare.  The problem is this insight is not unique, as virtually everyone and their brother expects the individual mandate will be struck down and the only real question remaining is if the Court will also void the requirement insurance companies cover people with preexisting conditions, or a little more extreme, void the entire bill.  To make money in the market, you need to bet on the things few expect.  Obamacare is not one of those things, so I expect this could be a suckers trade.  The last couple days priced in most of the potential upside, so there is little remaining for anyone coming to the party late.

The one thing less expected is the entire bill being struck-down, and that could lead to a further rally.  But a peace-meal solution will renew the healthcare debate and create new uncertainty for the markets.   Hard to see how that is a bullish development.  The market hates uncertainty far more than it does quantified bad news.  In fact, leaving Obamacare fully intact could be more bullish for the markets simply because the result is definitive, same goes for completely throwing out the bill.  This halfway stuff is the least concrete of the possible outcomes and generates the most uncertainty.  But this is simply my thoughts on this trade and obviously the market doesn’t give a damn what I think.  This simply means we need to trade the market, not what we think.

But for how to trade this, if all the bulls get in ahead of the ruling, that means we might not see new buying on the news and the market could sag due to the lack of follow-on buying.  Of course there could be a reserve of Johnny-come-latelys waiting to buy the news, leading to one final push higher before exhausting the bounce and turning lower.  We could potentially reach and even penetrate the 50dma, but I still expect we have a date with the 200dma sooner than later.

It will be interesting to see how this all pans out, but most disciplined traders should be out of the market and simply spectators for this show.   We’re close to the middle of the range and the risk/reward for a move in either direction is not favorable for initiating a new position right now.

Stay safe

(p.s. I’m having some technical difficulties with my webhost and am unable to add charts at the moment.  Hopefully this can be resolved quickly.  Thank you for your patience.)

 Posted by at 1:18 pm on June 27, 2012
Jun 262012
 

The market opened up half a percent this morning, traded down to flat, and then rebounded to the opening levels in morning trade.  Seems to be a modest relief rally after yesterday’s large sell-off.  IBD moved it’s market outlook back to Market in Correction after yesterday’s price action.  Momentum systems do very poorly in sideways markets, often giving false signals and leading to buying the peaks and selling the troughs.  Just something to be aware of for anyone following a momentum strategy like CAN SLIM.

It will be interesting to see how the day ends.  Typically declining markets will show early strength and then weaken into the close.  We’ll see if this modest bounce ends in a slide this afternoon or if it can add to its morning gains.

I still think there is some downside remaining because too many people still have a buy the dip mentality.  They will be proven right soon enough, but the market needs to shake their confidence first.  The markets have a habit of convincing you you are wrong before proving you right.  We very well could see that come into play here as we drop under 1300 before rebounding.  Once everyone’s given up on the rebound it will be safe to wade back in after everyone’s sold in anticipation of a bigger decline. Of course an unexpected and highly bullish headline out of Europe could flip sentiment and the traders sitting on the sidelines could start chasing the market higher.

Staying with Europe, it seems a lot of people are worried Greece could be the next Lehman Brothers.  But the truth is Lehman and Greece are 180 degrees opposite.  Lehman caught everyone off guard, the market did not foresee the vulnerability of the banking system, and Lehman’s implosion happened over just a couple months.  Compare this to Greece that’s been a highly publicized, slow-motion, train wreck, 2.5 years in the making.  For the public markets, these  two events couldn’t be further apart in terms of expectations and what is already priced in the markets.

The other big catalyst is the Supreme Court’s ruling on Obamacare.   Virtually everyone is expecting a repeal of the individual mandate, so that has long been priced in the market.  At best it will lead to a temporary bounce before sell-the-news kicks in.   I actually expect a piecemeal repeal of Obamacare will lead to additional uncertainty since it will be impossible to predict how Congress will fix it.  That uncertainty will pressure the markets more than if Obamacare is upheld.  The markets prefer certain bad news than the unknown because the markets tend to price in the worst when dealing with uncertainty.

With IBD moving the market in correction, disciplined CAN SLIM investors need to resist the temptation to buying shares before the market triggers a follow-through-day, which is a large up-day on large volume at least four days after the market put in a low.

Stay safe

 Posted by at 2:16 pm on June 26, 2012
Jun 252012
 

S&P500 daily @ 2:22 EDT

The market rallied into Friday’s close, but the move was obviously not sustainable given this morning’s dismal open and early trade.  It appears Friday was nothing more than a head-fake, sucking in premature bottom-pickers and shaking out weak shorts.  If this morning’s 1.5%+ decline holds, it will result in the market falling back into Market in Correction.

I suspect this down-leg is at least halfway through its move as many of the previous bulls and breakout buyers have already bailed on their recently initiated long positions.  1300 is easily within reach, but the bigger question is when will the market bounce?  If this remains a technical correction, it will run out of sellers soon.  Outside of unexpected bad news, the market will most likely find support between 1300 and 1280.  Of course sell-offs can develop a life of their own as selling begets more selling, but I think there is a strong possibility this leg down does not mark a new low.  Of course over the intermediate-term I still think the market is stuck in a trading range and the best way to trade this market is swing-trading; ie buying the dips and selling the rallies.  It will most likely be another month or two before we can buy the breakout.

Much like my March 13th analysis of a head-and-shoulders pattern, we also need to make steady progress transitioning from impulsive traders moving the market to real trades coming from institutional managers driving the market.  Impulsive trades rarely stick because there is no weight to this short-lived phenomenon.  Once all the impulsive traders make their move, the market quickly reverses because it lacks follow-on buying (or selling) from big money.  But with each successive failed move, the balance shifts from impulsive to real as the impulsive trader is less like to participate in the follow-up moves after being burned and losing money on the first or second failed breakout.  With the impulsive traders sitting out subsequent breakouts, it is far more likely for those to stick because these later moves are driven by a larger percentage of real buying (or selling) from the big institutions.  I did a better job explaining this phenomenon in my March 13th post if you want to read more about it.

I continue neglecting my watchlist in this environment simply because high growth stocks are so volatile.  They are up and down in dramatic fashion depending on the whims of the market.  The only good time to own high-beta stocks is when there is a strong and consistent wind at your back during a nice up-trend.  I’m still trading, but through index ETFs because these are far less volatile and more predictable in this environment.

As for predicting the market, many gurus say it is a fool’s game, but obviously I beg to differ.  The big difference comes from what data people use to make predictions.  It seems most experts are looking at the wrong things when their predictions fail to work out.  Sports make for a good analogy to this phenomenon.  A defender always looks for clues for which way the ball carrier is headed.  It is our natural tendency to look for cues in the head and eyes, but this can often be misleading and is the source of the term head-fake.  The ball carrier will often fake out the defender by moving his head and eyes one direction while moving in the other.  An inexperienced defender falls for the head-fake and goes the wrong direction, allowing the ball carrier to easily run by.  But a more experienced defender ignores the head and eyes and instead focuses on the hips.  While it is easy to move your head and eyes, the hips are far more difficult to fake.  You go where your hips are pointed and is why a defender who cues from the hips will have far more success than one who follows the head and eyes.

When it comes to the markets, it is also always trying to fake out traders and many times the fundamental and technical data send out misleading clues.   (I’ll get into why this is in a later post)  This is why I don’t put much weight in news or technical levels.  Most of my analysis is figuring out what other market participants are thinking and how they are trading the market.  The market is nothing more than a trillion-dollar popularity contest.  Get in the mind of other traders and suddenly the irrational and unpredictable behavior starts making sense.  It is never about what the market should do; it is about how market participants are positioned and what they expect.  Follow those clues and you’ll have far better success in anticipating the market’s next move.

Stay safe

 Posted by at 2:32 pm on June 25, 2012