Stock Market Updates: Sector Rotation Accelerates

Both of these sectors are beginning to roll over and that has kept the broad market S&P 500 (NYSEARCA:SPY) spinning its gears and looking vulnerable. stock market updates

I mentioned in the last couple of updates that the S&P 500 had reached 2 standard deviations above its 13 month MA which is indeed thin air territory. Perhaps yesterday’s sell-off is the start of a pullback…

We have backed away from it a bit and I still am of the opinion that the highs are in for this month.

An early recipient of inflows in this latest rotation appears to be the unloved energy sector, particularly large integrated companies such as Exxon Mobil (NYSE:XOM) and Schlumberger (NYSE:SLB). Again this is very early in the rotation and caution should still apply but I am building positions in the following:

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Again these are starter positions on a sector I think will do well in the next couple of months.

Sector Rotation

Rotation is the lifeblood of the bull market. I wanted to put out a few sector charts to highlight how some sectors are looking today.

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Thanks for reading and trade safe!

 

Twitter:  @CJMendes

Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.

 

NOT INVESTMENT ADVICE – PLEASE READ INVESTMENT DISCLAIMER.

 

 

Stock Market Updates: Using Time Frames To Manage Portfolio Risk

March 13, 2017

The broad market S&P 500 Index (INDEXSP:.INX) is showing some extreme signs of exhaustion following an incredible run post presidential election.

This last leg of the 8 year bull market in equities has shown some aspects that we could begin to equate to a longer term blowoff top. Now to be clear I am generally bullish equities longer term but I have become increasingly bearish in the near term.

The near term catalysts that have propelled markets forward have to do with various aspects of the Trump agenda.

Primarily it has to do with tax reform and the potential for many billions of dollars to come onshore via repatriation, money which, due to the onerous corporate tax environment in our country today, presently sits offshore. That would be extremely stimulative and could create a wave of stock buybacks, capital spending and perhaps even special dividends to shareholders, all of which would be very bullish for stocks.

Other aspects of the Trump agenda have also been seen as beneficial to particular sectors of the economy such as talk of rolling back Dodd-Frank for the banking sector or streamlining drug the FDA drug approval process for the health care sector. Last but not least is the massive proposed infrastructure spending programs which would create many jobs and be very stimulative to the lackluster economy.

What all of these have in common is that they are only proposed policies and even though Trump enjoys a majority in the House and Senate today, for these measures to come to fruition, he will have to have bipartisan support and bipartisan anything is wishful thinking in Washington these days.

Markets are ahead of themselves here as the saying goes and we have reached some significant measures of overbought that have been telling in the past.

Below is a monthly bar chart of the S&P 500 index. The Bollinger band’s simple moving average (middle line) is set to 13 periods (months in this case) and the outer bands are 2 full standard deviations above and below.

We are trading right up to the 2 STD line already following the major push higher in February. Since the 2009 low, we have not closed above this metric. The last time we closed above this same level was in Dec of 1999 and off course we saw a major pullback thereafter.

So no matter how bullish one may be in the longer term time-frame, the near term probability of much higher price levels, at least looking out through this month of March, are slim and consequently, the potential for a 3 to 5% pullback is elevated.

Stock Market Update: Using Time Frames To Manage Portfolio Risk

Markets rarely overshoot this metric to the upside as expectations are usually quickly tempered but often do overshoot these same levels to the downside as we can see in the same chart above. When traders panic, we get sloppy selloffs with everyone trying to get out of the door at the same time as we saw in early 2016.

So as far as my allocations are concerned, I am sitting with 1/4 size positions in several stocks, BAX, MRK, ABT, XOM, AET. Exxon (XOM) and Aetna (AET) are newly opened while the other three have been in the portfolio since late early December 16. Since my last update I have sold TLT, HAL and JBLU. Will visit these on a pullback.

Often part of my strategy is to sell option premium with the hope of being “put” stock at levels I find attractive and will do so on an uptick in voI.

I rarely keep more than 10 positions open in my portfolio and most often manage 6 to 8 positions which is where I am at right now. Lots of cash and I may consider going all cash should we push higher in the SPX this month, above 2 standard deviations from the 13 month SMA although I believe we have put in the high for this month in this index.

Again, this is not a long term bearish call but a tactical trading strategy.

Here are a couple other names I am looking at:  TGT and GE

 

Target Corp Chart (NYSE:TGT)

Stock Market Update: Using Time Frames To Manage Portfolio Risk

 

General Electric Chart (NYSE:GE)

 

Stock Market Update: Using Time Frames To Manage Portfolio Risk

Thanks for reading.

 

Twitter:  @CJMendes

Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.

 

NOT INVESTMENT ADVICE – PLEASE READ INVESTMENT DISCLAIMER.

Stock Market Updates: Market Insights & 6 Stocks I Own

As mentioned in my last two posts, I am long several stocks with 50% allocations for each as of today.

Those stocks are Merck (NYSE:MRK), Halliburton (NYSE:HAL), 20+ Year Treasury Bond ETF (NASDAQ:TLT), Baxter International (NYSE:BAX), Abbott Labs (NYSE:ABT) and JetBlue Airways (NASDAQ:JBLU).

On Jan 30th I had been long Freeport McMoran (NYSE:FCX) although that has been closed since as posted on my twitter feed @cjmendes.

I am still leery to add to these positions as my analysis still points to a market that is precariously overbought and thinning by the day. I am of the opinion we will get a fairly sharp pullback in the days or weeks ahead which will be a good buying opportunity into a very select group of stocks.

Nonetheless the stocks in the portfolio have performed well.

 

Merck (MRK)  My cost basis here is $61.06 and as of this writing it sits at $65.53

I like this sector quite a bit and I think a broad market pullback will reset this group for another major leg higher.

 

Halliburton (HAL)  My cost basis on this one is $53.37 and it sits at $54.10 today. I am on the fence on this one and keeping a tight leash. It’s up nicely today but has been an underperformer over the past several weeks. I may very well liquidate this one as soon as today. Have limited amount of funds to allocate to positions and I think there are better opportunities elsewhere.

 

JetBlue (JBLU)  My cost on this stock is $19.42 and it sits at $20.09 today. I am disappointed with the set up here. Take a look at my histogram below. When it fails topush through intogreen on price spikes it more often than not portends a move in the opposite direction. Liquidating full position today.

 

Freeport McMoran (FCX)  I sold this position on Feb 10th at $16.46. It sits today at $13.84. This stock has been hijacked by daytraders…

 

iShares 20+ Year Treasury Bond ETF (TLT)  My cost basis is $119.10 and it sits today at $120.45. This is a classic basing pattern and building accumulation as indicated by my histogram. Will be adding to this one soon.

 

Abbott Labs (ABT)  My cost on this one is $38.26 and it sits today at $45.00. Love the sector, love the name. Reaching some lofty levels and a pullback is likely.

 

Baxter International (BAX)  My cost is $44.38 and it sits at $50.27 today. This one has also been a great winner although I am disappointed with the lack of follow through on the histogram. Watching for now.

Markets are reaching extreme levels here within a very short timeframe. A Lot of market friendly news seems to be priced in and the tepid participation portends to a market with a quick trigger finger on the sell button should a catalyst emerge.

The VIX also points to a market that is complacent and therefore vulnerable to sharp pullbacks. Protection is very cheap in the form of puts and I suggest traders begin to evaluate using them here.

Sentiment sit at extreme bullish levels and a certain giddiness has developed among the perma bull crowd that typically comes along at important market inflection points.

My take, do your own research and reach your own conclusions!

Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.

 

NOT INVESTMENT ADVICE – PLEASE READ INVESTMENT DISCLAIMER.

Stock market updates- 6 Stocks I’m Buying Into This Stock Market Pullback

6 Stocks I’m Buying Into This Stock Market Pullback

Okay, so we are getting some traction lower within the short term trading horizon. Note that I highlighted my concerns with equity money flows last week.

The move lower is nothing to write home about just yet but it is allowing me to add some to existing long positions, while starting a couple new ones.

So what do I like here?

Note that I typically start positions at 1/4 size with few exceptions. That said, I’m starting JetBlue Airways (NASDAQ:JBLU) at a 1/2 size position today.

This has been a weak move lower so far in the broad markets. It’s currently around 10 to 1 lower early on but not in the size which would be indicative of panic. It’s important to remember that markets do fall on an absence of buyers.

 

My current trading plan/actions:

I’m adding to positions in Merck (NYSE:MRK), Abbott Laboratories (NYSE:ABT), Baxter International(NYSE:BAX), 20+ Year Treasury Bond ETF (NASDAQ:TLT)

I’m starting longs in JetBlue Airways (NASDAQ:JBLU), Freeport McMoRan (NYSE:FCX), Halliburton (NYSE:HAL)

 

Remember, these are my opinion and my analysis.  Here’s a look at the charts:

JetBlue – JBLU 60Min Chart

 

JetBlue – JBLU Daily Chart

 

Freeport McMoRan – FCX Monthly Chart

 

Halliburton – HAL 60Min Chart

halliburton stock chart hal trading analysis january 30

 

20+ Year Treasury Bonds ETF – TLT Monthly Chart

 

Do not allow your political ideology to cloud your trading investment decisions! Look at markets for what they are not what they should be.  Thanks for reading.

 

Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.

 

NOT INVESTMENT ADVICE – PLEASE READ INVESTMENT DISCLAIMER.

Stock market updates – Money Flows Highlight Elevated Risk In U.S. Equities

January 25, 2017

Will this sideways consolidation of the so called Trump rally lead to another leg higher or will it fail and take S&P 500 (NYSEARCA:SPY) and the broader markets materially lower? Stock market updates 

That is the question of the day and maybe of the year. The market seems to have taken a wait and see attitude at the current levels waiting to see the pace and tenor of the Trump administration’s rollback of regulations and Obama era executive orders.

As I look at quantitative readings, there has been a material slow down in money flow to the market as far back as mid November 2016. The contradiction of weakening internals and climbing index levels is a tough concept for young traders to grasp. So as fewer and fewer stocks continue to propel the broad indices, the market becomes much more vulnerable to sharper pull backs.

Of course, this vulnerability doesn’t always materialize into pullbacks, sharp or otherwise, but as traders, our number one job is to manage risk and managing risk goes beyond positional risk but to portfolio risk in general. In short, I consider this a generally “risky” broad market environment. Again, that opinion is supported by quantitative readings as stocks are being sold more aggressively into highs than they have been bought into lows.

The result of this type of market action is cumulative and tends to reach a point where rotation runs its course and market participants run out of attractive sectors where to put capital to work. Defensive sectors and Treasuries (NASDAQ:TLT) begin to outperform as the broad equity market corrects. We seem to be nearing such point now.

S&P 500 Chart

spy s&p 500 chart analysis traders january 24

 

20+Year Treasury Bonds Chart

tlt-20-year-treasury-bond-chart-etf-trading-january-25

 

How much and how far remains to be seen. I believe this pullback, if indeed one materializes shortly, will be a buying opportunity in select sectors that I feel are going to outperform this year such as Big Cap Healthcare (NYSEARCA:XLV) and Pharma.

Health Care Sector ETF (XLV)

xlv-health-care-etf-stock-trading-chart-january-25

 

Thanks for reading.

Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.

 

NOT INVESTMENT ADVICE – PLEASE READ INVESTMENT DISCLAIMER.

11/16/11 – 11/23/11

Daily Update

Tuesday, November 23nd, 2011

Nothing like a failed bond auction in a major Global player to whack markets….

The timing of this is what has really hurt the market today as many traders will not step up here before the holiday and take advantage of the move to scale into long positions particularly when the European markets will be open tomorrow as we celebrate the Thanksgiving Holiday.

Another issue irking markets are poor economic figures coming out of China. Nonetheless, the market seems to have found some support at the 1165 level or the first standard deviation off of the 40 day MA which I mentioned yesterday as the probable next “speed bump” should a catalyst emerge to shake traders confidence.

Failed bond auctions are obviously a concern particularly when the paper being auctioned is quality AAA debt of a major economic power such as Germany. I certainly did not expect this detail today and I am still not quite sure what to make of it. There are rumors that this failed auction could have been staged somehow for the purposes of sending a message to the ECB but either way, it is a concerning development. The Euro took a hit overnight on this news before paring back the loss a bit as we began our trading day here in the U.S.. Consequently the U.S. dollar is trading strong today against a basket of major currencies as the DXY (Dollar Index) is trading 1.1% higher.

VIX is higher today again but still very subdued considering the headlines and still within yesterday’s ranges… Either the market is totally mispricing risk or this is going to be classic head fake as we trade into December. Ask me yesterday and I would have said “classic head fake” but today I am a bit more skeptical…Because of this and due to the holiday tomorrow, we decided to chop down some bullish exposure on the IWM and QQQ positions even though these are longer term options. On the ETF portfolio, our TNA and EDC positions stopped out this morning on the move lower as I had purposely set rather tight stops on these because of the uncertainty ahead of the holidays.

We’ll have to see what the next few session bring. I am still leaning bullish but the headlines out of Europe are very concerning. The lack of coherent action from the EU leaders to stem the fallout of the crisis is really beginning to damage their credibility which is potentially why bond buyers are only willing to consider Euro bonds at much higher rates.

Wanted to wish everyone a terrific Thanksgiving Holiday!

Good News Bad News….

Nov 21th, 2011

The market action today brings some bad news and some good news. The bad news first…The politicians again failed to come to a compromise on the deficit cutting debate in Washington. Although this has not been formally announced just yet, the market today is pricing in the fact that no agreement has been reached by both political parties to find some middle ground. Along with the highlights from the congressional super committee, the market continues to weigh the debt situation in Europe and if that was not enough, overnight the Chinese vice Premier warned about a slow down in China that could threaten a Global recession…Talk about a triple wammy!

Along with the fundamental onslaught of bad news, the market today is dealing with some serious violations of important technical levels. First to go was the 40 day MA and then the simple 50 day MA which is widely followed as well as the psychological 1200 SPX level. The action has also been one of extreme breadth as we will probably see a 90% down day (90% of the S&P 500 trading lower). The breakdown of volume has also been decidedly skewed towards those declining stocks making the TRIN reach some very extended levels.

Now for the good news. I mention this not because I want to see the trading action through rose colored glasses, or because of any bullish bias on my part but because it is what it is and needs to be considered.

Considering the major price selloff today, we have not seen a major expansion of implied volatility. The VIX on a 30 point move lower in the SPX, is only up by around 5% as I write this and at its worse point around 9% higher. This is certainly not what we would expect to see following a weekend of bad news and on a Monday after expiration. Another point to consider is overall volume. The moves today have not yet elicited the type of rush to the exits volume one would have expected. This is crucial to consider here not because I believe the market action today is particularly “good”…but because considering the backdrop, it is not as bad as it potentially could be…

Because of the above I am of the opinion that the downside here may be limited and the market may rebound very quickly to test the old support levels broken (which now become resistance) over the next few days.

It is tough to get markets to sell off very aggressively in late November and December. Those bearish the market are leary to short stocks at this time because trading volume is low making markets vulnerable to whipsaw. I think this should be viewed more as a short term buying opportunity than a true bearish catalyst.

A close above 1185 would be viewed positively for those who want a decent, year end trading entry point into the market. At least this is how I am reading the action today!

Daily Update

Nov 18th, 2011

The market followed through on Wednesday’s weakness and sold-off with a bit of conviction on Thursday. Thursday’s bearish pressure has pushed the S&P 500 out of the recent consolidation range and moved the index back for a retest of support at the September highs. The breakdown has moved my short-term indicators into oversold territory and these indicators are at levels at which I would start to look for a mean reversion trade back to the upside.

The support level we highlighted yesterday at the 40 day MA has held again today and there is some evidence that seling pressure is evaporating at these levels.

The VIX is testing the upper end of a two standard deviation band and the 7-day ROC (Rate of change) for the VIX has moved into extreme territory. These short-term extremes in the indicator suggest that the VIX has moved a bit too far, too fast and short-term selling pressure may have become one sided. We’ve also seen the % of stocks > 2 standard deviations over the 40-day moving average (a measure of bullish pressure) move back towards the zero line. This tells us that the excesses created during the October rally have been completely worked off.

The market has created the short-term conditions for a rally. If the indexes have actually made the bullish change, which has been suggested by the price action in October, then the short-term oversold condition is a bullish entry point into the market.

Headline risk continues to be the wet blanket on the market and there “should” be little appetite to go long into the weekend but if the market does manage to push higher on volume late this afternoon, it could bode very well for next week.

The risks are obvious and they remain the same. Fallout from both a poor showing from the so called super committee in Washington and the continued weakness in Europe. Another risk which is also beginning to catch trader’s radars is the simmering issue in Iran and their nuclear aspirations. No doubt some of this rise in the price of crude is due to elevated geo political risks.

These risks, if alleviated, could trigger an explosive rally at any moment. I do favor an upside resolution here but we are going to play it cautiously into the weekend.

C.J. Mendes

cjm

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11/09/11 – 11/16/11

Daily Update Nov 16th, 2011

The market gave up the gains of the session very late yesterday and the broad S&P 500 index managed a close right at the 1257 level which corresponds to that flat on year “magnet” I have mentioned before which seems to be where the daily battle between buyers and sellers is being waged. The trading action yesterday was not much different than what we have seen of late. I hate to sound like a broken record in these updates but there there really hasn’t been anything different in the character of this market over the past 2 weeks.

We are reaching the third week of this consolidation and it is beginning to get “old”. By that I mean that sufficient time has passed to unwind the previously very overbought oscilators and that very soon we will need to see some resolution to this tug of war. The range we have been observing has narrowed over the past few sessions with the market making a series of higher lows and lower highs forming a symmetrical wedge pattern which by nature supports the probability of a more decided move either up or down.

The overwhelming and overriding event continues to be the worries over Europe. While many a bull market has been built on the back of investor “worries”, the potential magnitude of the Euro headlines has placed a “lid” on this market and rightly so in my opinion. While for us traders (particular those trading options) this environment presents many opportunities and potential for great returns, for the traditional investor, the risk versus rewarded presented by this debt crisis is not attractive at all.

Looking for a close this cycle at around 1250 on the S&P 500. This corresponds well with the current open interest around that strike and I do not expect a move either way until next week. Obviously the Europe headlines can cause markets to erupt at any point here but baring any major event, this is what sounds most probable with a slight bias to the upside of 1250.

Daily Update Nov 15th, 2011

Lingering concerns from Europe were somewhat mitigated this morning with some better than expected economic figures here at home. Particularly intersting was a drop in inflation which could, if sustained for a few more months, open the gates for another round of Fed easing (QE3).

This afternoon markets also seemed encouraged by the fact that apparently the new Italian prime Minister, Mario Monti, was moving quickly to build support for these austerity measures. How long this lasts is anybody’s guess…

There really wasn’t much else driving stocks on Monday. The market is maintaining the strength off of the surge higher in October but buyers are still hesitant to step up in a big way. The VIX is hanging onto the 30 level after traders twice over the past few weeks ventured to pullback on hedges only to get immediately burned.

From a purely technical standpoint, markets are well within a consolidation phase after a huge move higher and working off an overbought condition. A quick point on technical analysis and at least how I apply technical analysis to my day to day trading. Technical analysis means very little if not handicapped by other pertinent factors. By that I mean things such as sentiment, volume, momentum, seasonality, macro global headlines short term economic headlines and many others. If you don’t handicap a technical thesis with these factors, you are setting yourself up to fail. Stocks and indices do not have to stop at a support or resistance level on cue and change course or necessarily move lower when “overbought”.

Technical analysis, again in my view and I am aware that those who trade purely on the charts may find this heresy, should only used as a guideline to what most probably will happen when a stock or index trades within a certain technical pattern or reaches a particular support and resistance level. That view has to be tempered with a consideration to other factors such as I mention above.

Since HFT (high frequency trading) is such a huge part of the marketplace these days (60 to 70% of total transaction volume), we have to be very careful not to get whipsawed by blindly following any tried and true technical pattern. That is when these guys and gals are most active and in a thin market, it becomes very easy for these traders to manipulate the short term direction of the market and influence direction.

The same consideration has to be given to sentiment and sentiment based studies. These buy themselves do not make for good trading indicators by themselves but do help fortify or discredit a technical argument.

We bought to close the short Nov. QQQ 58 calls which were sold against our long QQQ June 56 calls. This is the 2nd strike we have sold against these long 56 calls and have bought both back for nice profits. Along with the buy back we also sold another round of Dec 58 strikes against the same existing long 56 calls.

A close above 1257 today would be a win for the bulls…

Expiration Week

Nov 14th, 2011

Last week was a real wild ride in global equity markets. We saw some steep declines in the S&P to the tune of 4% on Wednesday only to put in a 3.5% rally in the following two sessions…

Today we are giving back some of the gains of Friday and the VIX has spiked nearly 10% before pairing back some. More rumblings out of Europe and today we are seeing “Spain” in the headlines which I mentioned just last week as being exactly what would happen next in this drama… Folks this is not going away anytime soon.

We are holding right at the middle of the recent range and while volatility has increased of late, volume has been really non existent. The fact that volume has increased into selloffs versus a noticeable pullback on rallies leads me to believe a continued move lower to test the recent support levels at the 50 day moving averages is likely before a push higher.

As I have been saying, there is no reason for mutual fund managers and other “big money” players to put cash to work in this environment. The seasonal skew to show better than market results are being outweighted by the headline risks out of Europe. Better to show tepid returns than risk being caught in a rush to the exits…

An inter range level that has proven to be a magnet on both up days and down days has been the flat on year level of 1257 on the S&P 500. This could come into play this expiration cycle as we may very well close in this general vacinity at expiration due to “pinning” action at around this level. “Pinning” has to do with the level of open interest at different strike prices and the fact that markets will be influenced by market maker activity during the last days of an expiration cycle and tend to gravitate to the strike with the highest level of open interest. Again, baring any unforeseen headlines, this is where we may trade to close this week.

Contagion

Nov 10th, 2011

Contagion of the credit woes of Greece and the other weak members of the union to the healthier European economies has been the biggest concern of markets since this crisis began to surface some time ago.

In reality, this has been a concern to markets ever since the Euro came into being. The drastic differences between the more austere nations and the profligate southern European nations have always been something of a vulnerability within the framework of the European union and many feared that these vulnerabilities could be exploited in the right environment.

The lack of a clear framework to tackle these issues, whether good or bad, is just not part of the structure of the union and markets know this. Just as in nature where a predator hunting for a meal will focus on the weakest member in the group, the marketplace is focusing on the most vulnerable members of the European Union. In nature, once a weak member is attacked, the stronger members of the group may try and mount a challenge to save the weak member (s) from the predator if it is deemed that the weak member can still contribute to the group or If a member is ill, weak or perhaps too old, the group may not feel the challenge worth the risk and allow the weak member to be sacrificed. Such is the case at the moment in Europe. The weak nations are vulnerable to speculative atacks and the stronger member’s of the group seem to be undecided whether to mount an effort to try and save the weak members or allow them to fend on their own. The problem is that by hanging around, they are exposed to being attacked themselves… Such is the risk of contagion. The weakness in Europe stems from too much debt and is exarcerbated by a structural inability to shield its weaker members from speculative attacks.

These issues will not go away. The market senses the weakness and as free markets will do, will continue to pound away at this weakenss until the risk of doing so is greater than the reward. It is that simple. If the stronger members of the group do not do enough to change this dynamic they risk themselves being prayed upon by the market.

Here at home we have a Fed that, for better or worse, has the ability to overwhelm the market in these cases with easing programs like QE 1, 2 etc…Whether these programs are sustainable in the long run can be debated but what can’t be debated is the fact that the Fed does have this “arsenal” ready and available to use if necessary.

Yesterday we worried about Greece today we worry about Italy and tomorrow it will be Spain, Portugal and others…The cat is out of the bag and this deficiency in the European union will continue to be exploited until it is no longer a weakness. For that to happen, the stronger members will have to decide if they are staying put and mount a real challenge against speculation or opt to go off to find greener pastures…

There is no way to avoid a devaluation of the Euro and achieve this. You cannot have a strong currency while the world shuns your debt…Eventually, the ECB will have to intervene with aggressive rate cuts and similar quantitative easing programs to our own which will lead to a weaker currency but show the world that they mean business in regards to keeping the European Union intact.

Not impressed with today’s rally after a 400 point drop in the Dow Jones Industrials yesterday. Volume was unimpressive and there was nothing about today’s session that changed any of the current dynamics. Might as well be a continuation of yesterday’s trading session whereas instead of a 400 point drop we managed only a 300 point drop at the close…

Most probable move here is a continued push down to test the 50 day around the 1220 level. With the VIX trading at this level above 30 without much participation in the market (low volume) we can expect to continue bouncing around like a ping pong ball trading off of each headline out of Europe.

E.C.B. Needs To Step Up NOW!

Nov 9th, 2011

The trading action over the past 24 hours represents exactly what is holding back the markets from a push higher…

I have mentioned that for markets to start making a push higher into year end, we would first have to shed some of the worries about an immediate breakdown in Europe. Yesterday we saw the market once again push a bit higher on declining volatility. The VIX managed to pullback below 30, a level that is crucial for long term institutional money managers and mutual funds to begin considering putting money to work. Today those who waded too far in the pool have been reminded once again that headlines from Europe could still have a tremendous impact in the day to day trading action.

Today the VIX is once again trading above 30 as investors rush back in to hedge up portfolios. It is important to note though that we are not seeing outright selling of the market and volume has been tepid considering the price action. Markets make substantial moves (up or down) when institutions are involved in the market but that just hasn’t been the case. How can money managers put large amounts of cash to work in this environment? We have to keep in mind that institutions, because of the size of their trades and positions, do not have the ability to be as nimble as smaller players.

I think the market may be headed once again to the lower end of the trading range. That means a test of the 50 day MA with a potential dip as low as the 40 day. That puts us at around 1215 or so on the SPX where we should find some buying interest once again from short term traders and depending on the global macro headlines, institutional money managers.

I have to repeat that even with the near 30 point slide in the SPX today, markets are very composed. The selling that I would have expected in the Global equity markets on a blow out of Italian debt yields such as we saw today and the corresponding move lower in the Euro has not materialized, at least not yet. Either the market is totally underpricing this risk, or completely overreacting to it…

Again, in my view the uptrend channel recently formed is still intact from a technical perspective. The fundamental backdrop tells me that we may be headed to test support. In my opinion, the action today indicates a market that is still “waiting for the rain to stop but is eager to come out and play” ! So in short, look for a move lower to perhaps 1220 or so before another try at a push higher.

The wildcard in this thesis is if the ECB comes out with the proverbial “bazooka”. This means a ramp up of bond buying (particularly debt of Italy) to push out speculators along with more easing. I understand that the ECB does not have the legal mandate to act in that capacity but I think if the situation gets dire enough they may throw that to the winds and intervene. In this case scenario, we could see another massive drop in implied volatility and a barn burner of a rally. Today at least, I favor the move a bit lower as most probable case scenario.

C.J. Mendes

cjm

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