Marketwatch: Markets Keep Us Wondering

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Oddly, my last several posts were not published, although I thought they were.  Not exactly sure what happened, but my apologies for those that follow the blog.  Very sorry about that.

As a general rule, I’ve found that markets like to keep us guessing.  We are forever in search of clarity, but the market rarely gives us what we want.

And so it is now.  We have two indices – the S&P and the DOW, that look great and look like they will roll into new highs.  We have two other indices – the Russell (small caps) and the NASDAQ, that have been rolling downhill.  Normally, bonds rise as markets fall, but the S&P and the DOW are rising and bonds are also rising.  In short, there’s lots of divergences and confusing signals.

I will say this: it is quite possible that we head for new highs.  The bulls will make some fundamental argument about how things are actually quite good and that the economy is progressing quite nicely, albeit slowly.  Still, if we hit new highs, I don’t think that’s the reason.  We’ve had dips, but just as a matter of observation, the dips in the S&P have been bought – and quite quickly; almost violently in fact, meaning that the dip doesn’t last for very long.  To me, that signals bullish sentiment, at least in the S&P and the DOW.

The other consideration that seems important to me is this: markets are often set up to hurt the most people.  If you think this way, which is a bit contrarian, then the most logical direction is up.  Many are positioned with hedges because they’re worried and pessimistic about the mixed data, such as weak GDP, weak earnings growth and signs that the real estate recovery could be stalling.  Many are also positioned short because of all the selling in the NASDAQ and the Russell.  If the S&P and the DOW both continue toward new highs, that would drag the NASDAQ and the Russell into at least a short term rally.  This would wreak havoc on many shorts and those who bought downside protection.

One more note – if you do think this way, the most logical course is for markets to rally, which hurts many, and to sell off quickly after, because at that point, everyone will have been forced to remove their hedges, and all the shorts would have covered.

In terms of markets, the NASDAQ and the Russell are now at a temporary pause or bounce after several days of selling last week and the beginning of this week.  Because of that, we have a scenario where, if we get good news in the next few days, all the indices could, in theory, move upward.

Is this likely to happen and should the investor position for it?  Of course, impossible to say.  Any outcome is equally possible – we could rally, we could continue to churn, we could fall further.  We have no way of knowing.  But, we must make a decision.

For me, I am staying long stocks that I think are more likely to hold in a downturn.  ETFs are also good here, because they won’t fall as fast as some individual stocks, but keep in mind, they won’t rise as much either.  The sectors that have been doing well – value, old tech, energy – are likely to continue to do so as well, because they are still considered relatively inexpensive.

I’m also taking off positions that could hurt me if the market runs up very quickly.  For the S&P and the DOW, the most likely case seems to be upward or sideways churn.  For the NASDAQ and the Russell, we have a very short term bounce that is only likely for a few days.  After that, those indices will run into resistance – which we may go through, but we will have to see.

For the S&P, I have a short term target of 1894, which is 10 points away and the 1.27 extension of the last swing.  We could see a pullback after that, or, if we push to new highs, then the target would be 1924, the 1.27 extension of the swing from the last high of 1897.

One final thought – we have a jobs number this Friday, which always adds a bit of volatility.  Because of that, we’d have to be prepared for the possibility that a good number, especially one that indicates the winter weakness was indeed due to weather, could push us upwards.

I have long and short positions in the S&P.

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