Holding Pattern!

As in holding almost all CASH....

T'he market is stuck between the 50 and the 200 for the moment... and I am holding... almost 100% cash...

It's amazing how calculated the moves off of the 200 and 50 day moving averages were in the past week. As I have reiterated before this appears to be greatly a technically driven market. Quantitative/ computer based trading contributes to this. So does the fact that we have mixed signals fundamentally at least in the short to mid term (terrible housing market, job losses, higher food and energy costs... juxtaposed with the Fed moves, the fact that we are in an election year, and other factors). To make sense of all this I believe that the money managers are really focusing heavily on charts and on historical precedence. So let's take a look at the SP chart...




First and foremost... the SP is below the 200 day simple moving average. A moving average is really a "curvilinear" trendline. By definition (or more accurately the formula used to calculate moving averages) the only way for the 200 day SP MA to go up is for the SP to be above it. A downtrending 200 day MA is a sign that the long term picture is down and that we are in a Bear market. That is one of the reasons that the forceful recent bounce off of the 200 was so important. Until/unless the 200 day MA is breached with volume we have to assume that the market is going down long term. Considering the fundamentals of credit leverage (Trillions of dollars), and the fact that the hedge funds and institutions know firsthand how finances and credit squeeze works, it all makes sense that they are bearish.

At the same time, as of now, the market held support at the 50 day SMA. This means that we are stuck between mixed signals at the moment. According to technical analysis it is generally recommended to be long in an uptrend, short in a downtrend, and in cash when the trend is undefined/ uncertain. (Source : Technical Analysis of the Financial Markets by John Murphy). This is a generalization but this is, in part, why I am almost all in Cash right now. If I do get into more stocks or ETFs in the near term it would probably be as a short-term trade only. At some point we will either break the 200 day MA with volume (highly unlikely anytime soon in my opinion) or we will fall below the 50 day MA with volume (pretty likely). I wouldn't want to be long just about anything if/when that happens. Until either of these two scenarios plays out the risk of being long or short for more than a few days seems pretty high to me. As far as I am concerned this condition creates the opportunity to learn about/ shore up technical skills and also to closely watch a lot of stocks ETFs and investigate which ones may be primed and ready to go when a clearer trend is defined. If the 50 is broken I will look to get into short ETFs until the new trend is broken. Also we may then see stocks like MA, POT and ISRG hit key support areas. The point is that a break of either moving average with volume will create the real opportunity we seek. Now is the time to do the work to set up that moment.

That being said I will still be looking to get into certain shorts or stocks, but for trades only and with more limited capital than if we were in a more defined trend. Also if there are stocks that seem to continue upwards despite the market (rare but happens on occasion) I will watch these closely and perhaps get in until they prove otherwise...
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A few other points to discuss/observe:
1. In both Fibonacci retracement and Dow theory the 50% retracement level is considered very important. If you go to StockCharts.com, type in SPX, and go to the "interactive perf charts" link at the bottom of the page (or you can go to bigcharts.com) you can find the points at which the 200 day MA was hit (and bounced off of) and the point at which the rebound on the 50 day MA was hit.

Here are the numbers I came up with:
200 Day bounce: Close: 1426
50 Day Bounce: Close: 1376

(1426 + 1376)/2 = 1401. Friday's close? 1400.38... almost halfway (50%) between the two...
Just in case you didn't think the technicals were important here...

It is interesting to note that it is slightly below. I believe the 200 day bounce was the stronger of the two and I would not be surprised to see a gradual bounce down (like a rubber ball falling to the ground and bouncing up, each time a bit less than before) to the 50 before we break through. Of course major news or events could affect this. And I don't have any historical data to back this up specifically although in a bear market, with the secondary "reaction" uptrend now clearly broken, it is not unusual for the peaks to get lower and for them to rise with lower volume. This is just something I will be watching for... and let the charts decide.

Another point: on the last post I was watching DLTR and COST. Both reported very good earnings. This helps confirm my US recession stock bull market thesis. These are the kind of stocks to look for if/when the market goes below the 50 and then sells off the good names with the bad....

Also I was watching SIGM. I haven't had a chance to listen to the CC but the 20% selloff on 58% increase in revenues yoy, double earnings yoy, and a 2c per share miss? That's exactly why I don't want to be long just about anything right now except for a trade. (I may look for a bounce if I have time... but I will get out quickly if I do). It is true that I would have done more DD if I was actually holding the position so maybe there is something there I did not see. Either way, in this market I would probably sell off a good part of the position in a stock behaving like that before earnings.

On that note there are certainly a few companies that may be excellent plays now to buy and then sell before earnings... and in some cases maybe hold a little through earnings. Here is something I like to follow: on my web page under "useful links" I have a link to briefing.com earnings. I highly recommend that you print this ahead of time so that you can see what companies are coming up. I like to highlight market movers like AAPL and GM in one color and highlight companies thatI have interest in with another. Also available on the site is the medium term economic calendar... always good to have these around... I hate it when I'm caught off guard by an earnings release or economic press report that I didn't know about ahead of time. The method of printing the earnings really helps in this regard...

Also there are certain potential trades that can be identified this way. Often companies like AAPL or other strong stocks will predictably trade upwards going into earnings. By checking the calendar a few weeks in advance sometimes one can get into names that have historically gone up before earnings... then in this market perhaps sell before earnings and keep the difference. This would be a trade so I would use a stop in case the market collapses before earnings.

Ok some more points for perhaps another post... or posts...
I have meant to do a post on Solar stocks to follow up on Industry Analysis- the future of alternative energy (see top posts) but haven't gotten to it yet. But I have been looking at the sector. One of the best out there (but please do your own DD) is TSL. They report on Thursday.

Also the coal segment cannot be ignored. Just can't be!!! I am digging into this more before coming up with a final conclusion... but... as Trader Mark claims (he may be right) it just may be the next fertilizer play...

Best,
Jon

This blog is for informational purposes only. It does not give investment advice.