As earnings season is just kicking off, the recent crop has shown mixed reports, some good and some bad. The main point is this is proving we are not in an apocalpytic state even though the economy is not improving. The market has been moving according to some of these earnings, but quickly forgets them and moves on to being handcuffed to EU news. This is creating a situation that is frustrating many traders, myself included.
It has been a very frustrating few weeks as the market is not acting logically. Due to the extremely low volume in the markets these past few weeks, High Frequency Trading (HFT) is controlling the markets and they play by their own logic. Rumors of more EU funds being allocated to a losing situation (throwing money at the situation is all but proven to be a big waste that won’t fix the problem) is causing the bulls quickly jump in head first. Logical traders are scratching their heads wondering why we’d be bullish just because of fluff headlines that “sell” the idea of a solution, yet remedy nothing.
We are still in need of a technical pullback, yet we are mostly trading on very light within a small range (between 1233 and 1190 in S&P 500) that is within the larger trading range of the past few months (1233 and 1074). This small range is still at the top of the larger range and a pullback is desirable for many reasons, which doesn’t have to indicate the end of the world is coming. We are almost sure to get another fluff headline from the EU claiming all is under control, political garbage as far as I’m concerned, but will the bulls run with it or have a sell-the-news reaction
As most of you know, I don’t like to predict, but I do like to plan. I believe we could be setting up for a move up on these headlines, but I’d be more inclined to start shorting it by adding to my ProShares UltraShort S&P500 (SDS) position and reducing long positions at the same time. The odds of the EU actually making the tough decisions to truly remedy the problem is about as likely as our politicians here making the right decisions, very slim and shocking if it does happen.
The point I’m making is be ready for a rush of volume that moves the markets up on another fluff EU headline, but don’t get caught up in the emotions of buying into it (outside of a quick day trade) just yet as I believe the move may not be sustainable. I’ve been reducing some SDS lately in anticipation of this, and will try to unload a little more on Friday if we trend towards the 1190 area, or lower, in the S&P 500 (SPX). I’m still hedged both ways, but as long as stocks continue to move insync with the overall markets, it doesn’t pay enough of a premium to be a stock picker. This makes for very boring days, but this too shall pass, someday.
For housekeeping purposes and due to all the emails, I’ve reduced Gastar Exploration (GST) and Dejour Energy (DEJ) to core positions on their respective moves up. I feel both are undervalued, but the technicals tell me they need a pullback before we can really trust a larger move up. If the markets sell off, speculative stocks like these tend to take the biggest hits rather than large caps that have stronger fundamentals. On healthy pullbacks, I will look to add to both those long-term positions.
Be ready for some fireworks, just keep your head clear and emotions in check whenever they finally happen. As always, do your own homework to see if you agree. Good luck out there.
Mike
At the time of publication, Kudrna was long SDS, GST and DEJ but positions may change at any time.
