With oversold conditions on Friday, we managed a bounce as the market tried to digest and desensitize itself from the headline risk. The volume was weak and the bulls were unenthusiastic which was a reminder of the low-volume V-shaped recoveries we have seen so often during QE environments yet go against many rules the market has taught us over the years. We did find a way to push above the 50-day SMA in the S&P 500 (SPX), a key support level, but bulls are being very cautious at the moment. Technically speaking, this is a great setup for shorts to dig their feet in and start to press downward, but most times during this environment that they attempt this, they fail. This makes some of the old rules in the markets seem no longer pertinent, but as QE winds down and if it is not renewed immediately, these old rules will start to apply once more and the undisciplined bulls will learn a hard lesson when that time comes. With just over three months left of QE2 and the Bernank being hard-pressed to justify QE3 anytime soon, we could see a harsher environment as the steroid injections (QE) are no longer providing an unfair advantage to the bulls.
POMO resumes next week, so I would be shocked to see the market completely fall apart, but after the recent broken action, it would be just as shocking to see the market quickly rise past numerous resistance levels. Due to this market uncertainty and recent red flags, I have put myself in a mode of capital preservation to ensure I do not have significant losses to make up for by gambling heavy on the long-side with no clear “edge.” There are times to bet aggressively on the direction and at this moment, I do not see a more clear path. Many times, market players feel obligated to pick a direction and bet on it, but sometimes the best action is to take some of your bets off the table allowing you to watch and analyze with little risk. When you feel obligated to play, you will find yourself choosing the wrong side more often and that creates significant losses that must be made up before you can be profitable once again. Without seeing an “edge,” you tend to trade with less odds in your favor meaning you will need more luck on your side.
The only area I have not reduced due to market uncertainty is biotechnology. Biotech tends to ignore headlines and market direction much better than other sectors creating a type of safe haven, when used correctly. A full blown market sell-off will find biotechnology taking damage as well, but uncertainty like we are seeing lately is better digested leading me to focus my attention there.
S&P 500 Monthly Chart (editing mistake on chart, “green” arrow is supposed to be “yellow” arrow)
S&P 500 Yearly Chart
If we can break above last Thursday’s highs, we have a chance to really attract more confident bulls thinking they will miss out if they don’t act soon and aggressively buy. Until then, I am staying cautious and letting the path clear up before redeploying my heavy cash reserves. If we go straight up from here, this may mean I can’t be on CNBC claiming I called the bottom perfectly as so many others will loudly proclaim, but I am still able to net strong profits while holding less risk in my portfolio, my ideal strategy.
As always, do your own homework to see if you agree. Good luck out there.
Mike
No positions mentioned
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