They got them shorts on the run now

Hi there, and welcome back to CRI's S&P 500 blog.

For those new to investing, this is a very dangerous market to learn the ropes. Making a bet long or short during these 'clean-up' phases can be profitable but it also can be very costly. We always want to look at any trade from a risk perspective and given the volatility seen lately, one has to appreciate the associated risk. Talk about volatility - over a three week period (through the end of the summer) the market fell 18% (133.89-109.7/133.89) and now in just three weeks it has rallied 15% (123.97-107.43/107.43). Could another double digit percentage swing be far off? Only time will tell but one thing is for sure - expect more volatility. 

While the fundamental backdrop has been relatively good over the past year or so, things aren't looking so rosy going forward. Two factors drive stock valuations - earnings and Interest rates. We have been confident of earnings but one can't help but get concerned when 2009-2011 market darlings like RIMM/AAPL/NFLX have either completely fallen apart or are starting to miss expectations. Corporate short term interest rates (as measured by Eurodollars futures contracts) are now trending higher not lower. This means that the credit squeeze that started the meltdown back in 2007-2008 is back on. At the same time, longer term government bonds have moved violently higher pushing their yields down. While not inverted, the yield curve is flattening which suggests that the broader economy is starting to slow. Weather it be the effects of Europe's indecisiveness over its' Sovereign debt or Chinese Central bank tightening economies are slowing and as savvy market participants we must listen to what the market is telling us. We talked a while ago on WCTS Spotlight blog about HG Copper and how it is called The Professor of Economics. Read our comments re. copper and you will further see validation to the notion of a slowing global economy.

So with all that said, how ought smart market participants to be positioned?

Investors: In our last blog entry (10/07) we suggested 'Investors' ought to be sitting in cash and doing nothing and have been advocating that stance for some time. I would re-iterate that mantra today. While our time tested trending indicator (that being the relationship between the weekly 13 EMA and the 30 SMA) remains negative, one ought to just sit on the sidelines and wait it all out. Considering the extreme volatility of the market right now, as investors we don't want to be looking at the screen every five minutes. Should that moving average relationship change (at current levels that isn't likely for some time) we will change our stance. While you won't make a pile of money sitting in short term government paper, this is a time not to be greedy.

Traders: In these kind of trading environments, fortunes can be made and lost in a matter of minutes and it is not for the faint-of-heart. Ironically, this kind of trading pattern is very common after prices have corrected to the 50% level. The 'trade' was to short up top and take profits at the 50% level, what we are seeing now is the clean-up from the trade. Quite often a market will break lower, consolidate, then break lower again (as was the case three trading weeks ago) but the last break lower turns out to be a trap. The market quickly reverses and heads right up to the top of the range. This is exactly what happened here. The 110 level was taken out three weeks ago which suggested we were going lower. The market then reversed and took out the trading range high of 122.87. In essence, the market ran out of sellers on the push through 110. When the floor traders saw this, they ran the market back up looking for any sellers and for the 'stops' on existing short positions. In summary - they got the shorts on the run.

Since we have left a rather large gap right at the 50% level (117.715), I personally wouldn't be inclinded to chase the market here. It looks to me like we will take a serious run at the origional breakdown point of 125.05 and then the 127.50 area (trend line resistance) after that. Considering how close we are to those levels now (123.97) the associated risk of going long doesn't make the trade justifiable. Those that were able to switch long on the pivot through 120 (congrats on a smooth trade) ought to look to those upside targets as areas to exit. This may happen in the coming days or may take a few weeks to develop. Keep in mind, the market is once again getting overbought on a daily basis and we are still bearishly trending on a weekly basis so at best one ought to be looking for a seasonal top over the next eight week to sell into.

That's all for this week,

Brian Beamish FCSI

The Canadian Rational Investor

the_rational_investor@yahoo.com

therationalinvestor.ca

The long slow process of cleaning things up

Hi there, and welcome back to CRI's S&P 500 blog.

As the stock market in general (and in this case SPY specifically) has entered its twelfth week of consolidation one can't help but notice how bearish market sentiment has become of late. Only a few months ago we were pushing to new relative highs on both a healthy yield curve and robust corporate profits. While the yield curve has flattened appreciably over the intervening period, corporate earnings are still holding in which suggests to this market watcher that the bear market we entered through the late summer shall be only that and that we are in nothing more than a healthy (albeit painful) correction period for the market. 

Technically speaking, one should have appreciated the noticeable bearish cross of the weekly 13 EMA and the 30 SMA some twelve weeks ago. That relationship is still very much bearish suggesting there ought to be further correction ahead. One should also respect the fact that the important low put in  nine weeks ago (109.70) was violated just this past week. Lower highs and lower lows define a bear market - and judging by the market's action over the past week - we are still very much in a bear market. Having said that, the time to short was at or near 125 not now. Indeed, fortunes are won and lost trying to pick exact bottoms so I will leave that thought with the basic message that we have hit many of the well defined down side targets (50% rule, previous rally peak, 200 Week SMA, etc.) and one ought to be taking profits on shorts - not adding new ones.

So lets see how our two respective market participants ought to be positioned:

Traders: This camp would have gotten new sell signals on the break of 109.70. Stops on the trade should be just above recent resistance (just above 122.80). This would represent a 12% risk and maybe a little to large of a risk for most traders to take.  For those wishing to trade to the short side - use this past week's rally to look for a failure into resistance (just above 120 area) on the daily charts. The lows of this past week ought to be tested at some point down the road and that would be my short term target on any shorts taken.

Investors: This camp was well advised to get out of the market in earnest back through the late summer and more specifically upon the break of the important low of 125.70 in late July. Our time tested trending indicator (that being the relationship between the 13 EMA and the 30 SMA) is still very much pointing lower and has been the mantra for some time now - CASH IS KING. Consider too that the US Dollar index has been moving higher for about the same period, it would appear that international money managers are respecting that mantra.

That's all for this week,

Brian Beamish FCSI

The Canadian Rational Investor

the_rational_investor@yahoo.com

the-rational-investor.com