Market Musings

02 February 2011

 

Market Thoughts

Since Fridays sell off, the SP Future gained 42 points so far and this is a remarkable rally off the 1262.25 bottom early Monday morning or Sunday night US time.

Needless to say, I warned in my article dated 29 January 2011 that one day sell off does not justify being a bear.

Quote: The weekly chart shows no sign of a sell signal and maintains a positive stance. One day of heavy selling does not justify to jump into an early conclusion. The SPX must drop below 1260 to confirm a down trend.These are facts. I like to see the RSI drop below 50 before jumping into bearish mode.

Quote: As we can see, all above 3 indices had not a real negative week to jump into a full blown bear. I giggle a bit seeing over excitement in the bearish camp. A conservative trading approach is - > await the real signal and do not trade on behalf of excitement.

Caution was warranted and it paid off handsomely by not falling into the early trap set by the bulls. Having said this, caution shall be warranted for upside too. I do not see any urge to be fully invested at these levels even so I added 2.5% of selected PM stocks last Thursday. My equity long position remains reduced at 42.5%. The time will come where we will all see very handsome entry prices again. Stocks trading a multiple of 200dma are not worth chasing.

Bearish for sure is the VXO below 15 and the its multiple is 0.66 x 200dma. Those numbers were exactly the same when SP500 lost 8% last year 19 January in only 3 weeks.  Being a Commodity Bull since August 2009 and seen such overbought numbers, I am very well aware of the severe correction within the Commodity Sector or CCI. The CCI is trading over 1.26 x 200dma and this is far stretched by means of being overbought for this index. Precious metal stock can go 1.6 x 200dma as we saw early December and was reason for me to exit a lot of PM stocks with a view to buy them back cheaper. Naturally, I do have core positions and did not sell all J

We have seen some very good earnings but still, the very same day or a day later many of those were sold off. We have seen only a 1% drop 19 Jan and 28 Jan of 1.7%. The last longer lasting decline was back in November 2010 but minor. Needless to say, we had 7 month of rally in the SP500 without an 8-10% normal decline. This is even measured by Bulls an astonishing time frame and the number of 300 points gain is extraordinary.

Being very much alert, after re-break of 1291 and a new high at 1307, we can assume that we are indeed very much stretched. My first warning sign would be 1291 break and 1287 (1283 ES) SPX. This would signal to me we are heading far more south without attempting new high shortly after. The decline should usually last at least 3 weeks and the first 2 weeks should be the steepest.

Rest assured when the decline starts and it will, commodity stocks will outperform decliners by a large margin as they did within the rally.

DO NOT THINK that Commodity stocks will be excluded from the decline! They are actually the best to short as they do tend to decline more and they usually dip just below the 200dma to find a bottom.

So pick the right stocks to short and watch the 200dma as your target in Commodity stocks.

Stay alert and Kung Hei Fat Choi to all you traders out there