Friday, February 5, 2010

Trend No Longer Bulls Friend

When listening to most investors talk about the market, the thing that strikes me is how hard it is for people to change their directional bias.  We are raised to buy stocks, and therefore have a bias upward.  Each dip is greeted with "when should I buy?".  We are told over the long run stocks go up.  In the long run we are all dead however.

I would argue that right now, one must adjust their thinking 180 degrees.  Most of the time, including the past 11 months, the only question is what dip do I buy?  Now the question is what surge do I sell into?   For 11 months if you dared to be short it had to be quick, and precise or you got your teeth kicked in.  There were down days, and even a few corrections within the uptrend.  But now you have to think if you want to be long it has to be quick and precise.  There will be rallies along the way - but just as you had to take advantage of the few down days to cover shorts, now you have to take advantage of the up days to sell long exposure.  At least until the market changes its overall trend.

We are going to see oversold bounces along the way, and due to our natural bias everyone will constantly ask "was that the bottom?" "should I be buying here?"  But these bounces, which could be profitable for the extremely nimble are now akin to the drops we saw in the market the previous 11 months.  Only the agile need apply.

This is not a chart you'd want to show to small children or family pets.  The S&P 500 can rally a good 30 points from here and still be screaming "get the heck out of Dodge". 

Just remember Monday and Tuesday of this week if that bias inflicts you - yes there was a very short term opportunity to buy stocks but all it was, was oversold stocks bouncing into resistance. If you were not quick, you were dead - and aside from daytraders that sort of trading does not apply to the majority of the populace...

Nothing goes in a straight line and we now have a very obvious target of the 200 day moving average (S&P 1046) as an eventual goal.  That doesn't mean the S&P can not pop upward first.  But make no mistake, the easy bullish trend finally appears to be broken, at least using the (daily) technicals.  Those who rely on weekly measures still might be holding out hope; but I expect some of that hope was extinguished yesterday...

My strategy will be to pick at some stocks along the way here on the long side (but not yet) - many names in my watch list are now down 30%+ in just a few weeks.  I'll give them a whirl closer to the 200 day moving average on the S&P 500 and try to make a few sheckles, but with tight stop losses.  If this is a garden variety 10% correction we are about 3/4 of the way through.  If it's 20% type of correction we are 1/3rd of the way through.  But even a 10% correction will mean breaking through the very important 200 day moving average on the S&P 500...

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