Tuesday, February 2, 2010

So Far, So Perfect Oversold Bounce

As happy as I was with performance last week - I am equally unhappy with navigation of the market this week thus far.  So far we've had the perfect oversold bounce with the last 2 sessions sharing many characteristics of 2009's rallies.

Yesterday for example - premarket surge whereas futures were flat around midnight Sunday; almost all the action in a flurry of early morning buying, then flat line all day before a quick rush at the end of the day to finish off the bears.  I've seen that day over and over and over in 2009.  Both days - little volume on the upside move versus the selloffs (on medium to heavy volume) but still the market marched up.  Volume seems to mean nothing anymore.  Together, more makings of a non traditional "V" shape bounce - rather than seeing any consolidation.... if the move can contiue from here.  This is why the market has been such an unnerving place for bears for the past 11 months - you cannot celebrate your victories and if you stay even 24 hours too late you are turned into a fly on the windshield.

Coming into the week I wanted to protect the very large (unrealized) gains of late last week, but have handed quite a bit of it back.  I thought S&P 1085 would provide at least some minor resistance but other than stopping the advance for about 3 hours yesterday, it proved to be nothing.   The only saving grace was we locked in half our short exposure Friday when the gap filled at 1071.50.  The other half was pummeled by yesterday morning's surge.  I did sell most of the put exposure (kept a bit) once 1087 was broken very late yesterday since that was the intraday high and once it was broken, off to the races we went to close out the day. I married that with a smallish (3% exposure) SPY call to help hedge off the portfolio since we were stopped out of so much long exposure the past 2 weeks.

What I am going to do now, to create a fresh mental start, is sell both the SPY calls bought late yesterday (3% exposure), the remnant of the SPY puts and then cover the levered ETFs (house of pain there) that we were short as S&P hits 1100.  This level is where the S&P 500 had a lot of trouble last week, so I will be interested to see if it can slice through it today - if so, look for a surge in the closing minutes, only because that seems how it is always done. 

From there we are going one of two ways.

1) 2009 is back again... V shaped bounces on little volume crush bears in non traditional fashion. A mountain of resistance lies ahead at S&P 1110 as the 20 and 50 day moving averages converge.  A move north of that level (I'm using 1115 mentally) would signify we're back to things that don't make much sense.  All the "selloff" did in this case was fill 2 gaps that needed to be filled before our race to S&P 1200+ continues.

2) every other year before 2008-2009 is back.  This is day 2 of a 2-3 oversold bounce which will fail in the S&P 1100-1110 area as resistance is hit.  This is how it would of worked in historical terms and I am still going off that playbook since this is what I have seen repeatedly since mid 1990s, but I have receny bias and remembering all the losses suffered in May-June 2009 trying to fight the "strange market that can rally relentlessly without volume".  So rather than go with historical precedence (ex-2009) I am going to be reactionary rather than trying to guess ahead of time.  If this was 2005, the chart of the market and countless individual stocks would scream at me to build up short positions from here to S&P 1110 en masse.  They are perfect set ups.  But all it takes is the "urgent buyer" to show up tomorrow morning in premarket, get the S&P back over 1115 and this selloff was all just a faint memory. 

Either way, we are ahead of where we were in portfolio value since Wednesday of last week, but quite unhappy disgusted with letting so much profit disappear as the quickness of this move caught us off guard.  Especially considering we said to "watch out for the oversold bounce" in our weekly summary. 

I will be keeping the long dollar positions (UUP and UUP calls) as a low beta hedge to any further downside.  Almost all the individual long charts are still not "buys" since all they have done is bounce back to resistance.  Back to watch and wait mode as these 10 S&P points will make the world of difference.

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