Friday, January 21, 2011

"Correction" Over?

Is that it? A whopping 1.2% correction and back off to the races?  If I knew that, I'd be David Tepper who apparently every manager in the world will be tuning into at 8 AM to let us know how to position ourselves for the next 6 months.

All we can do is try to put probabilities in our favor, so let's go to the chart(s).  [the first time we've even had an opportunity to as the 'boring market that only goes up' made any analysis useless the past 7 weeks]

Looking at the S&P 500, normally I don't focus much on the 10 day moving average but we have come off an incredible moment of weeks on end without a break of that very light support level (on a closing basis).  Despite the 2 day "sell off" the stick save yesterday afternoon actually pushed the index right near the 10 day, give or take a rounding error.  The dip buyers still feel immune.  More important to me is the 13 day moving average (not on the chart) because that is the level this index bounced off continuously in Sept and Oct 2010.  And we have not even come within smelling distance of it since Dec 1st (until yesterday).  As you can see we had a perfect bounce off the 20 day moving average yesterday, and until this level is broken on a closing basis there is really nothing here for the bears to get excited about.

Small caps have been the leadership group since Bernanke adding a new Federal Reserve mandate of manipulating asset values upward over what they "otherwise would be", at Jackson Hole Wyoming in late August.  Indeed the Russell 2000 has rallied from 600 in late August to over 800 earlier this week (over 33% for those playing at home).  This index did break the 20 day moving average so finally showing some wear and tear - something to take note of.

NASDAQ?  More similar to S&P 500 than Russell 2K at this point, by holding the 20 day moving average.


So at this moment, we've just had a minor blip of a massively overbought stock market; but that does not mean throw caution to the wind.  Dip buyers will keep doing their thing until it stops working, and then based on how the market has worked the past 2 years, once it stops working - any meaningful drop should happen in a very short amount of time.  Thus far (if I was up and running) the only major hedge I would have on is the VIX April calls I mentioned 2 weeks ago, mentioned in the low $17s (I would have added some in the $16s as VIX fell in the ensuing week)   We *could* have a potential double bottom in this index as seen below.  But for now we're at least back to positive on the trade and all it took was 1.33 days of actual selling after 7 weeks of none.  If all of the major indexes above break below the 20 day moving average on a closing basis, then other hedges would definitely be considered.

Other than that, it is off to listen to David Tepper to tell me exactly what the market will do the next half year!  Can't wait to see if they put water on the set of CNBC, to see if he can walk on it.  I'll report back shortly.

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