Thursday, February 4, 2010

Conditions Remain for Textbook Rollover in Market

While the moves have been spikey and much faster than I anticipated both up and down, conditions remain in place for a textbook rollover.  After the initial move down, our cursory oversold bounce did happen - generally these last 2-3 sessions.  The S&P basically bounced 2.5% in 2 sessions but much of the move was in very concentrated periods of time even within those 48 hours.  Yesterday was a stall out day, where the market was unable to make a new intraday high versus the previous day.  Today we have a dramatic selloff to start the morning, once more in a very concentrated period of time.

While the vicious nature of the moves in such short amount of times is hard to wrap one's arms around; the larger roadmap makes a lot more sense to me than much of what happened in 2009.  I recognize this pattern a lot more - since it was the one that used to work in mid 90s to 2007.  That said, watching the market move up and down so quickly - with seemingly no memory of the previous 24 hours - does tend to shake you out of some convictions.  The oversold rally tacking on so much of a % gain in just 2 sessions, certainly shook us out of short exposure - which now is a regretful action.

As we wrote in the weekly summary, you could make attempts on the long side as there was surely a bounce coming but you have to be oh so quick and only the most nimble should bother.  Very difficult for a "fund" to do - but I suppose an individual trader you try to roar in and out but you really had to come into the week long to really benefit.  That has played out perfectly.

We are approaching oversold - but that doesn't mean a dark day or two (or three) cannot lie ahead before a snap back bounce. The "oversold bounce" can happen Monday, Tuesday, Wednesday who knows. Just don't get excited about it, and be drawn in by the "Fast Money" crowd would will proclaim wonderful times are here again. In old school technical analysis, this bounce will set up some excellent short selling opportunities.

Expect commodities and foreign stocks - especially of the Chinese kind - to lead the oversold bounce... but it's only for the quick and nimble to play; others risk losing fingers or entire hands trying to catch falling knives.

I continue to see no reason to make any aggressive moves on the long side... and continue to view this market from the prism of the short side. A close below recent intraday lows (1071.50) should point to a new leg down and a test of the 200 day moving average below S&P 1050. Notice the 20 day moving average now crossing below the 50 day moving average which we noted would happen this week.

Despite that 2 day respite the advantage appears with the bears at this time.  This morning's weekly jobless claims was a horror - almost back to 500K.  I don't take too much stock in any 1 week's report but that was very disappointing.  Of course tomorrow morning's monthly report will have a ton of focus on it.

I've added some short index exposure this morning and continue to like the dollar here.  I have little interest in long positions.  I remain interested in protecting capital at this juncture - little else.  Cash levels are the highest in a long time.

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