Wednesday, July 04, 2007

A dose of bullishness

I took a look at what I wrote last summer when (shock and horror!) I was very bullish. Apologies for the writing which is simply poor in parts (and that's my bad):

June 27th: The tension finally broke as markets took a sharp dive on increasing volume. Given the extent of across the board declines the increase in volume was unusually muted. Has the capitulation already occurred? Watch how June lows hold in all markets. The semiconductor index is the most vulnerable as it finished Tuesday at new closing lows. While the Russell 2000 flashed a bull trap also losing its leadership role to the S&P. The S&P held to joint resistance of the 20-day MA and a downward price channel; watch for new lows if support of the channel is tested on the next decline.

Secondary technical indicators or market internals [$NASI, $NAA50 and $BPCOMPQ] stepped back from some of their recent bullish action. The $BPCOMPQ switched back below its 5-day EMA along with the $NAA50. The supporting technicals (MACD in particular) of these indicators remains strong thus favoring a more substantial bottom than market selling would imply.

on July 5th I wrote this

July 5th: "Stocks tumbled Wednesday as renewed uncertainty about Fed policy, ongoing geopolitical concerns and record high oil prices prompted investors to lock in profits." according to Yahoo!. But I don't really know what sort of 'profits' are getting locked in from those 'investors' who haven't already sold after 2 months of declines.

Thursday will provide a clearer idea of seller's intent. Monday's low volume gains on holiday trading weren't worth the paper they were written on was proved true on Wednesday. Volume did climb along with the selling, but was below average for the month, and did not clearly mark a distribution session in the markets. The day was not without its concerns, chiefly the potential 'bull trap' in the NASDAQ 100, aided by a drop in relative strength to large cap indices [Dow and S&P]. Although the 'bull trap' hasn't emerged in the NASDAQ, it may only be a matter of time before it does. Watch the 20-day MA of the NASDAQ very closely - if this fails it could bring to end this nascent rally.

Large cap indices [Dow and S&P] fared better as last week's breakouts held as technical indicators improved. The S&P did give up its Monday's cross of the 50-day MA, but such a break on low volume was unlikely to stick. The Russell 2000 suffered a similar fate as it gave back its cross of the 50-day MA, but remains well clear of its resistance breakout.

Two of the three tech market internals [$NASI, $NAA50 and $BPCOMPQ] climbed as the $NAA50 gave back a sizable chunk of its gains from its deep oversold low. I still like the parameters for a bottom but one can never rule out a crash. Let the market decide if you should be in and out by using June lows as a natural stop level point for current positions. I still think we are good to go for bullish positions, but if you are looking for a bearish bias then Bill Cara wrote a good piece over the weekend.. Trader Mike has a more wait-and-see approach to today's action.

I turned cautious in October

October 3rd: Large caps [Dow and S&P] played a picture perfect test of support on higher volume, to mark a resumption of their uptrends. It was a close call for these indices and each day raises the stake as the marker for support increases daily. Technicals still run in favor of the bulls, but the weakening MACDs of each index should give pause for concern.

Tech indices [NASDAQ and NASDAQ 100] were also able to enjoy accumulation days. But one of the chief contributing indices to their strength, the semiconductor index, failed to join the fun - instead, it confirmed a break of channel support. In addition, the lack of technical support as represented by earlier MACD 'sell' triggers and declining +DI (= weakening bullish strength) undermines the bullish thesis for these indices.

The Russell 2000 is wedged between the 50-day MA and 200-day MA, changing little on yesterday, but was unable to generate strength in supporting technicals as the index diverges away (in terms of relative strength) from the other indices. Bulls should be concerned - no strong rally was built on large cap stocks alone.

Also running in the bears favor was the final bearish reversal in the tech market internals [$NASI, $NAA50 and $BPCOMPQ] as the $BPCOMPQ cut below its 5-day MA, accompanied with a 'sell' trigger in its MACD (following Monday's 'sell' trigger in the CCI). The ultimate oscillator of the $NAA50 also lost its bullish divergence dating back to May. Bit-by-bit, tech market internals crumble.

With a more negative view in November:

Nov 7th: It looked likely one was to see new closing highs for the markets, but afternoon trading kept the party pieces under wraps. There was some technical repair; on-balance-volume of the Dow was back above the bullish mid-line; the MACD of the NASDAQ looks set to bounce off support of its June-July bullish divergence; there was a MACD trigger 'buy' in the semiconductor index after a second day of solid gains - resistance at the 200-day MA awaits. The index was also able to gain relative to the NASDAQ 100 - a good sign for bulls. Tech market internals [$NASI, $NAA50 and $BPCOMPQ] saw a little improvement with a bullish cross of the 5-day EMA by the $BPCOMPQ. Overall, the tech market internals have not reached overbought levels typical of bull markets - this could give the markets a final push to their stops

Given Democrats have control of the House, bruised Republicans can take heart the result should be good for their stock portfolios over the long term. It will be interesting to see how the market reacts to the news; will it sell the news?

Markets have been kind to bulls with a decent stretch of a rally since the bottom in June. Although I have been touting a bearish point of view to cover the next 3-4 months (I am a month into that observation and the market has [not] turned yet!), cyclical bulls can take heart from the new 52-week highs, stalling the start a new cyclical bear sequence (within a secular bear market), only the Russell 2000 remains vulnerable to this outlook. Selling into strength is the strategy to employ, new positions in this market enviornment are a more risky proposition.

As for individual stock holds - look to trail your stop; give stocks room to move upside, but protect profits (particularly for positions taken in the June-September stretch); for some it will be breakeven at minimum, but I really like whatever low the stock made in last week's dip and place your stop 1% away from that - this should see a 20-25% profit on many positions (don't worry if its not - a new long side opportunity will present itself over the next 6-9 months).

Since November I have more or less stayed true to this skeptical opinion. In pictorial form, my opinion on a month-to-month basis looks like this:

The March-July rally of 2007 has surprised me (and may continue to do so) with its force of will. The Cash is King philosophy hasn't been a bad one given it is easy to get 5% risk-free on your monies (with rates on the rise). Assuming an average November close for the Nasdaq of 2,392, add to that 3.33% for 8-months of interest at 5% would give a risk adjusted close for the Nasdaq of 2,471. Based on Tuesday's close one could suggest there was approximately 7% in lost revenue by staying put with your monies rather than holding it in the market ((2,644 - 2,471)/2,471); expressed another way - buying last summer and holding to today would likely see you up 23% versus 15% for buying at the same time but selling in November and staying in cash.

(Just to remind myself!) I can be bullish - it's just I don't see a strong reason to be so. Losing 7%+ but waiting for a ripe buying opportunity sounds a better strategy to me than trying to get out at the next top (assuming one 'predicts' it). I will no doubt read many tales of market bulls making just such calls right before the next 10%+ correction occurs.

I won't be one of them.

And I doubt they will be either.