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| The casinos have been some of the strongest stocks in the market. |
Investors and traders have enjoyed the steep, resilient rally from S&P 1040 in September all the way to as high as 1274 this week. Long-term portfolios have likely seen significant gains, and the technical action has been great for active traders. With back and forth action to start the new year, I believe its time to take some risk off the table.
There are times to be heavy in the market and there are times to be light. The Fed made clear its intentions to prop up assets prices at the now infamous Jackson Hole Summit in late August; that was a time to be heavy and confident the market was going higher. The rally has rarely rested since that time, but I am starting to see signs that a long awaited correction could be possible. We don’t pretend to be clairvoyant, but as market timers we try to maneuver ourselves out of harms way as much as possible and put money to work only when the risk-reward ratio appears in our favor.
Disciplined risk management should be the hallmark of every active trader. Right now, I perceive this action as a hint to take some risk off. We are seeing some real selling across several groups in the market today. Also, we have seen some of the lagging sectors and forgotten stocks perk up. like Citigroup, Inc. (C), Wells Fargo Company (WFC) and the solar stocks, usually a sign that at least a short term top is imminent. The only sensible approach right now is to look for quick momentum, pattern type trades rotating through different sectors.
The first signs of weakness came earlier this week when the commodities began to really crack. Gold and oil saw significant technical damage, and truth be told the carnage wasn’t as bad as it could have been. The banks took their turn leading the market, but tiday we saw their upper range break as well.
The above chart shows the accelerated uptrend we’ve been in since breaking above 1227 on the S&P. Mid day we tested the uptrend and it held; the breakdown, if it does come, usually doesn’t happen on the first try. The current uptrend line stands at around 1260-1262. A break and close below that area, would put us into a corrective pattern, so I want to give sme support levels to watch. Macro I am a buyer, so I will be gauging the strength of the market at each of these levels while looking to be a buyer.
Support #1, which is very shallow, is the 20-day moving average. Strong markets (this one qualifies!) often hold that area, which currently stands at 1255.
Support#2, which would be a great area to be able to buy with conviction, is around 1232-1235.
Support #3 is huge support from the prior breakout at 1224-1227. I don’t expect us to get here, but if we do I would measure composure and buy strong stocks.
We’ve seen very tradable action lately. Many of the stocks we often list here were the leaders of the market. Names like Apple Inc. (AAPL), VMWare, Inc. (VMW), Amazon.com, Inc. (AMZN), priceline.com Incorporated (PCLN), salesforce.com inc (CRM), to name a few. A few of the stocks we put together with a January effect thesis in December were big winners the last few weeks as well. The following December calls in Cisco Systems Inc. (CSCO), Eastman Kodak Company (EK), Adobe Systems Incorporated (ADBE), Bank of America Corp (BAC), and MGM Resorts International (MGM), have played out well.
Each market participant has his/her own time horizon, and you must treat your portfolio accordingly. For macro longs, this is no time to be alarmed and by no means do I think this rally is close to over. But if you are an active day or swing trader, this is a time to lighten up and live to fight another day when risk is lower.
*DISCLOSURE: Long MGM; Short SPY
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