Double Top or Advance the Rock?

Strange days continue in this market... yesterday was a great example. Futures flat - and then an explosion of buying on no news within the first hour of the market being open. Why? Great question. You don't usually see the market move like that in advance of a Fed meeting. There was no news... but just a rally out of the blue. We are working on day 23 of 24 without a pullback of greater than 0.5% in the S&P 500... the rally itself here is not remarkable in of itself but the nature of it - without any serious pullback for even a session is.

I am looking at a lot of individual charts and continue to be stared back with stocks on parabolic runs or stocks slowly breaking down, breaking support. But the general market is holding up - my watch list is not full of the type of merchandise that has been in favor the past two weeks so that could explain the divergence in what I am seeing versus the market doing fine. I am actually working hard to find new long positions since (a) we expunged quite a few completely from the portfolio lately and (b) many stocks sitting at the bottom of our portfolio at 0.1% type of stakes have poor charts. Because they are weak, they are staying as tiny holding positions until they fall much further or jump back over key resistance areas. On the flip side, almost everything I like is running on a 45 degree angle.... hard to chase into those.

Thus far on the S&P 500 Fibonnaci has held his ground - he rejected the bulls [Jul 7, 2009: Fibonnaci's Last Stand] on their first thrust forward (no real surprise there) With yesterday's morning jump out of the blue, we are making a second advance to the upper 1010s. So either we are about to hit a double top, or about to make a new leg up. Action in the next few days should give us a resolution to that riddle. I will keep leaning on the technicals here - because so many computer triggers are now set to them. If we break north of the high of last Friday, I expect computers to rush in yet again. This pattern continues - a technical level is breached, computers rush in. Rinse. Wash. Repeat.

We're having another very good 4 week period, and aside from 2 unrealized losses in shorts Wynn Resorts (WYNN) and Capital One Financial (COF) I am content with everything, so I don't have any performance anxiety issues that apparently are afflicting much of the Street. As we are now in week 5 of rally mode, and most of these rallies have been 6-7 weeks in duration before some rest / retrace we are just biding our time until football season when I think there is a better chance for the forces of darkness to reassert themselves. A lot of signposts that used to signal inflection points are everywhere - but they don't seem to work very well anymore - insiders unloading stock like made to ravenous computers, complacency high, speculative junk rising the most, short interest dropping sharply, et al.

• Wagers against the Standard & Poor’s 500 Index fell to the lowest level since February as investors shorted fewer shares of financial stocks. Short interest on the S&P 500 declined to 8.77 billion shares as of July 31, a 12 percent decrease from two weeks earlier, according to data compiled by U.S. exchanges and Bloomberg yesterday. That’s the steepest drop since Sept. 30, 2008.

I will keep saying I think the nature of the markets has completely changed with the advent of computers dominating the game. The exact number is hard to gauge - some people say 30%, some people say 70% of all trading is now computers - computers don't have human emotions so what used to work, works less now. I've said that for 2+ years and I'll stick to my guns there. Basically take half the volume each day, and understand that is just computers making thousands of trades (sometimes in a minute) doing things you will never understand and have little to do with the company's prospects or fundamentals. What will be interesting is surely there will be a Black Swan event sometime in the next 10 years where computers will crash the market. And then we'll ask "how did we get here?" And maybe ask "what is the stock market for?" It used to be as a way to raise money for companies, and let people "bet" on long term prospects of a company as "shareholders" of a company. Now it's just a way to slice and dice millisecond profits off non random pattern recognition. Which will increasingly drive out old school humans, frustrated by that. And those comments have nothing to do with the market being up or down - I literally fear being in the market the last 10 minutes of the day with what I see happening each day; sharp moves up or down on huge floods of volume. I wonder how different the market would ask if we had an outrageous rule like you had to own a stock for at least 5 seconds. Is being a "shareholder" for 10 seconds egregious? I bet volume would drop 30% instantly...

• Machines are taking over the management of equity assets, according a new report issued this week by Tabb group, the research house that drew heavy attention to the proliferation and effects of high frequency trading in US equity markets. Securities Industries News wrote up the report, saying Tabb believe up to 34 per cent of US equity investments are now managed by a broad set of strategies that can be classified as “quantitative” or automated methods. That compares with 14 per cent in 2000.
• What is occurring is “the gradual automation of the entire investment management process across a comprehensive spectrum of investment strategies,’’ the report, authored by Paul Rowady Jr. and Adam Sussman, said.

So the market acts differently; plus all this money being borrowed from the Fed at 0-0.25% (up from $40B in 2007 to $900B+ now) can't be sitting on bank balance sheets, I am sure like in China some is coming into the stock market. At least China admits this is happening...

Anyhow, whatever the case - until things change or HAL9000 recognizes a new pattern, I'm content to make some intraday moves to keep up with the bulls (did 1 yesterday post Fed that paid off nicely) and keep looking for longs that are not in stage 5 of parabola, while keeping my list of new shorts to add to. We mentioned Shanda Interactive (SNDA) last week and how we kept trying to short it with a limit order but we kept missing (from $54 to $53 to finally $51.75, still missed our entry!). [Jul 7: Shanda Interactive - Weak]

It continues to be weak and shows there is money to be made on the short side even in good markets. Just don't short Las Vegas casinos, banks or REITs I suppose!

Short Wynn Resorts, Capital One Financial in fund; no personal position