Tuesday, August 18, 2009

Easy Short Trade Has been Made

I am going to use the SPY ETF (the S&P 500 parallel in ETF world) for the chart below rather than the S&P 500... essentially you can slap a 0 on the end of each number and it will get you very close to the corresponding S&P 500 figure... i.e. SPY 98 = S&P 980. (not exactly but close)

I want to show the SPY because of the gap that filled yesterday at 98, which in my mind was the "easy trade" on the short side. Now that it has been filled, we are in a white noise area ... as we wrote in the weekend summary - a breakout north over intraday highs of the past few weeks (SPY 102 = S&P 1020) would get us positioned for a new leg up. On the other side of the equation a break below SPY 98 = S&P 980 would get us positioned for a new leg down. In between those 2 areas? White Noise area. A cursory bounce would be expected and now we will see if we "fill the gap" to the upside in the SPY 99s.

Common sense would indicate we have a larger correction coming, but common sense many times means little so as always one must be open to any possibility. To that end what I did yesterday was cut enough short exposure, while adding some long exposure to get back to a 1:1 (roughly) ratio in common stock, while still have my option exposure only on the short side. Hence I'm leaning short but not as heavily as I came into the week. Since I believe there is a great chance we are in a topping process I would like to see a rally into the gap so I can get back some of the shorts I cleared out yesterday at better prices (higher). I would also expand short exposure on a break of S&P 980 as that would indicate we have a great chance to S&P 950s.

Of course my assumption could be wrong and we just continue to chug along but I won't buy that thesis until we get north of S&P 1020. (SPY 102) Any analysis by the pundits on what the "market is telling you" between S&P 98 and 102 is nonsense right now. This is a technically driven market and the computers are waiting and watching. They will be jumping once we make a break either up or down, and until then the high frequency traders are happy to skim the money off the top while waiting.

Housing numbers today were (gasp) worse than expected for the first time in a while. What is that? Seasonality is starting to turn against housing as we enter fall? As I've been saying for a few weeks it is hard for me to put bull horns on considering the precepts of this rally: China and housing are correcting (in the former situation) and about to enter seasonally weak period (in the latter situation). Pushing marbles in on the long side here could gain in the short term, but I consider it a quite high risk proposition. I did buy a few names yesterday but mostly as a hedge since I entered the week only 10% long.

Gun to head, we rally to fill the gap to the upside and then flip around like a fish out of water for a while, and then retest S&P 980 later this week or next. The behavior there will be a good tell of where we are headed in the coming weeks. But don't read much into the fish flopping between S&P 980 and S&P 1020 - that is only something for the financial infotainment TeeVee folks to get all excited about. It means nothing other than to daytraders - if your perspective is more intermediate as ours is... white noise.

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