Brief Thoughts on Market Action and More

Edit-
"However, I did cover a good amount of my shorts around 800 to reduce risk."
This is a generalization... to be more specific and to demonstrate integrity, the shorts were covered between the the 815 and 825 region at the end of the prior week... I apologize for any confusion on this and should have been more specific.
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A. The market overall
As we all know the market exited the trading range on the SP from 800 to 950 and did so in the manner most probable- by following the longer-term trend and moving towards potentially lower lows (already experienced on the Dow). Previously I mentioned the bear case but I also wanted to point out that the bull case could not be entirely discounted short-term and that, from my perspective at least, an defined exit strategy needed to be in place in case the bear bias was refuted. The 880 region on the SP held its ground, as did the corresponding levels on the SSO and QLD that I had mentioned as stop points. As a result my positions were never stopped out. Clearly, short exposure from those levels was beneficial. However, I did cover a good amount of my shorts around 800 to reduce risk. This conservative approach was the right one even though it translated into smaller gains than would have been achieved otherwise. I bring this up because it is relevant to what is important: where we may be likely to go next.

The break of major support levels on the indexes is consistent with the assertion that we have not yet seen the completion of Elliott Wave 5 down and that we are likely to see new lows in all of the indexes in the next few weeks or much sooner. Also, the support areas have become resistance and have been tested several times and failed. This also supports the bear. However, while it is most probable that we at least test lows, and probably break them, the sideways action we have seen recently after the major selling in the fall means that it is time to be much more bullish now than last May or October. That is to say, that while we may still go down considerably from here and I still hold short-exposure, it is time to more careful than on the bearish side than it was when the market seemed like it was just undergoing a minor correction or when it was in complete free-fall. My philosophy has been to short the market primarily when it has tested support turned resistance at the former support levels. This is the highest probability area for downward movement and allows for the smallest losses if the market is able to prove to us that it can overcome selling pressure. It is also important to be cognizant of the fact that the markets are short-term oversold and that at some point soon a squeeze is likely. That being said, once this market becomes less oversold short-term the bottom could really fall out in a 'flush out the remaining optimists' kind of way. In such a backdrop I personally do not yet feel comfortable gaining any significant long exposure.. though I may consider some small nibbling action on certain strong names.

This is just my take right now... we of course have to see how it plays out. As always please note that 'the Rose' provides one point of view only and that, while it tries to be informative, it must be always be integrated with multiple perspectives into your overall understanding of things.

B. Nationalize
I also wanted to mention that unlike the selling in the fall the action in the last few months has seen significant disparities between the fundamentally strong names and the weak ones. Financials, real estate, and regional banks in particular, have been hit while companies with strong balance sheets, like POT and MOS, and good earnings, have outperformed the market and in some cases shown considerable gains. One reason for the weakness in banks and other poor fundamental stories is the fear that the government will eventually nationalize banks to stabilize the system. A few posts ago it was mentioned that the 'bad bank' idea was probably a first step towards later doing what is more likely to work- nationalize. This may help the system but it wipes out shareholders and bondholders. Markets can be highly irrational and terrible fundamental stories can do quite well for long periods of time... that is until the word 'bankruptcy' or 'nationalize' comes into play. Traders have no control over the bottom falling out and in such cases must sell early if they perceive they could lose their entire investment.

This is where fundamentals do matter.... and likely always will.

Currently, while I remain short right now and have no net long positions, I am looking to go shopping for strong names for when the time is right. I still like POT, and to a lesser extent MOS, and also potentially MON, as well as CMED, MYGN and many others, especially tech names, that have proven with earnings and charts that they are as well positioned as any to weather this economy. Even if/when we do see a rally I continue to contend, as I did on the Christmas post, that it likely will be yet another bear market rally, even if lasts quite a long time in duration.

"The Yellow Rose Street Beat" is for informational purposes only. It does not give investment advice.