It’s been quite the stock market rally since a modest 5% correction took the indices at/near their respective 50-period moving averages (see Figure 1 below).
A MILLION REASONS TO SELL
Of course, the drop from the all-time highs (May 22) was swift and painful for those who were long, but what else would you expect at that point? As I’ve said many times, there are a million reasons to sell, and taking profits is but only one of them.
EARNINGS BUMPS AHEAD?
Today we find ourselves right back at the scene of the crime – new highs all around (save for the Nasdaq which has a ways to go), and now we are facing a challenging earnings season – or will it be?
So far, a few earnings releases have shown mixed results. The caution flagged from first quarter earnings was warranted with much of the worry coming from a slowing economy, tax issues, a slowdown in consumer spending and the famed ‘sequestration.’ Those impediments did not harm the market performance; in fact prices rose in the face of it. This time around, we may see something different.
DIRECTIONAL PLAYS
I’m always concerned playing directionally when prices get ahead of results. That seems to be the case here with the recent market rally. We may see the classic ‘sell the news’ effect starting next week when a deluge of earnings hit the street. I’ll be playing it cautiously (close to the vest) and really go with the flow of the market and trends.
THE STRATEGY
I prefer playing individual names rather than the market but will always respect what the overall message is. One of the best strategies is one we have talked about previously, volatility plays – strangles or straddles.
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