Best of Breed Investing

When will the Stock Market Rally really end?

We’re all wondering about this and waiting for the “Bell to ring”. It’s too bad it’s not that simple and without a Black Swan Event catalyst we could drift sideways or rally slowly for quite awhile.

The SPX has a lot of support now and 1140/1130 are the 1st two levels of support on any little pullbacks. The DOW has a support at 10.5K followed by 10.4K. Watch these levels closely as buyers may come in turning any bear move into a head fake.

Many pro’s like Cramer and others are turning very bullish on Banking/Financials again which amazes me as FAZ is the most oversold ETF in the world now.

Watch XLF, it’s a 1:1 ETF so the daily moves are more in line with reality than UYG or FAS. If it breaks above 16 you’ll probably see large moves in UYG, FAS, GS, BAC, JPM, C, MS, and regional banking. The same goes if UYG prints $7 share.

http://stockcharts.com/def/servlet/SC.pnf?chart=XLF,PLTADANRBO

Also watch GS very closely as that will probably be the first indicator of a reversal in the current bullish banking sentiment. It’s supremely obvious that Financials, Best of Breed Stocks, and Bull ETF’s are way oversold and due for a pullback. The question is whether it will be a small one to the support levels I mentioned followed by new highs or a real full-blown correction.

I looked at a long term chart of the VIX and 12 is about as low as it’s ever been since 2003. The RSI signals for the DOW and SPX are at typical turn point highs and I believe the only thing holding up the market is Financials and less “stirring of the pot” from Capital Hill. If the employment report is good tomorrow we might see more upside or vice versa.

It still wouldn’t take much to crash this party but I’m not going to fight the tape. Now 25% bearish, 75% bullish, 24% cash till I see some reason to change (which would be the Financial sector breaking down).

Looking forward a couple of months we might see a Sell in May and go away event or this market might just rally all the way till August in fits and spurts barring any geo-political Black Swan events.

ONE news story could end this or at least cause a big pullback which is why I like having at least 25% in ultrashorts.

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Stock Market testing yearly highs?

Last Friday was the perfect setup for a news driven rally and then a fade into the close which looked probable till the last hour of trading. Looked like at least part of the pop above SPX 1130 was due to short covering but improvement in the employment outlook seemed to be the primary catalyst. Now the stock market seems on a clear path to re-test the yearly highs as there is no resistance between here and SPX 1150. The RSI signals for the SPX and DOW are both almost at 70 which typically signals a reversal and looking at the charts it’s pretty obvious a re-test of highs will result in a slight profit taking pullback.

The key question all professional traders, investors, financial analysts are asking is WHEN will we see the next correction? Will it between now and May as many expect or the last half of the year? There are even a few brave hearts saying this rally will continue till SPX 1200. There are certainly enough potential Black Swans out there to cause several corrections or even a long protracted downturn. Even the most bullish pro’s out there are deeply concerned about the effects of the Fed’s tightening monetary policy and potential tax hikes in the USA after the November election.

All week we had somewhat negative news, low consumer confidence, low home sales, continued economic concerns over Greece, China, Great Britain, and Spain. Regardless of any of this the market continued to “climb the wall of worry”. Our first clue that the rally would continue was on Thursday when GS started breaking out which continued into Friday. This was very good for UYG and FAS but not for FAZ or SKF. The DOW chart has been a story of head fakes lately when it appeared 10,400 was the ceiling. I did predict correctly that strength around 10.4K would lead to 10.5K which is major upper resistance. The DOW clearly broke above that level last Friday and I now believe we’ll see some little pullbacks and a 2 steps forward 1 step back dance all the way to yearly highs or higher near term. The yearly high is going to be met with a lot of resistance as well and would be a good place to consider some more shorts or at least some profit taking.

The VIX Index is showing a major relaxation of fear and its a measure of puts –vs- calls which shows Options traders turning more bullish. The last time it got this low resulted in a 900 pt DOW drop and a 8% (10% intraday) correction. This is the primary reason many of us were adding to our ultrashort positions last week including the highs of the day on last Friday. The ultrashort ETF’s were on an uptrend till the last 200 pt burst upward on the DOW and the SPX breaking above 1125ish.

AAPL, one of my favorite Best of Breed Stocks hit all time highs Friday on news of their impending I-Pad product release and buzz that corporate America may adopt it’s use.

How are we positioned for next week and what do we expect near term? Members of Best of Breed Investing are privy to detailed trading plans via our discussion board, email alerts, and a Live Chat Forum where we discuss trades in real time.

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Golden Cross signal on US Dollar

On Feb 18th the 50 day moving average signal for the US Dollar ($USD) crossed above the 200 day moving average. Historically this is a bullish signal for whatever equity is involved and in this case it’s the dollar. If the US Dollar does in fact continue to rally what does this mean for the price of Gold, Precious Metals, Commodities, and Stocks in general?

I first started looking at the dollar relationship in April of 2008 and then warned we would see a big correction in all the aforementioned sectors if the US Dollar rallied. Let’s look at Gold and Gold miners. GLD has a price objective of 94 and the probability of hitting it will be directly tied to the dollar pricing near term.

GDX (Gold Miners) has a positive price objective but must break above the red downtrend line if bullish momentum is to continue.

Let’s look at the VIX to see what measure of fear is in the market, as you can see it’s almost at the last low which is where the last 8% pullback was triggered.

What does this mean going forward, will the rally continue?

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Bradley Turn Date imminent

Futures markets are up this evening which is hopeful but not a guarantee of an up day tomorrow. The dollar is down slightly and there are more rumors of a bailout for Greece. There are definitive technical resistance levels that must be overcome for this rally to continue that will be discussed further in this blog entry.

Who knows, maybe China will revalue currency and we’ll rally for a month or two.
There are also other trading plays coming out of the Chilean earthquake in the members area here and some are Best of Breed Stocks.

I’ve been giving a great deal of thought to the current economic/world conditions and the data is a complete conundrum of chaos and confusion (CCCC for short). That’s why I like hedging/buying protection in uncertain times.

On one hand since January we’ve seen RECORD earnings and BTE (better than expected)reports from the majority of companies in America along with a slew of improving economic indicators. Certainly looked like the recovery was well under way but……..

On the other hand the stock market ignored said BTE earnings, existing and new home sales are down, jobless claims are up, and last week the 30 yr mortgage rate rose again. Congress is gridlocked and the current admin doesn’t seem to be giving any confidence to investors or world markets and this doesn’t count the financial limbo in the EU.

Next week is CRITICAL for bulls. How are we positioned going into next week? What does the infamous Bradley Chart predict?  

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Is the Stock Market Rally really over?

“The best strategy in my opinion in times of uncertainty or close to market peaks is to have 20-30% in Cash, 20-25% in ultrashorts, and 50-75% in Best of Breed stocks or bull ETF’s. Though my gains were limited when the DOW came up from 9800 my losses were controlled rather nicely on the way down using this strategy. When the DOW was below 10.2K we had no clue if lower lows were imminent or if the highs of this rally had been achieved. Prior to last week my drop dead warning level was DOW 10K, not it’s DOW 10.2K and hopefully I’ll get to raise it to 10.4K this week.”

I wrote the above in my last blog and the balance of bulls/bears has proven to work very well especially on news driven bearish pullbacks. Today was a perfect example of when to “Leaving Well Enough Alone” which I didn’t do. As the market tanked below DOW 10.2K, Conditional Sell Orders executed for all USD, UYM, EDC, and some FAS. Right before this happened I had a sneaky feeling it was a fake out and changed other CSO’s to DOW 10,150. In retrospect I wish I would have done it for all sell orders and not made any changes. Some days it goes like that and you just have to shake it off and go forward.

Looking at the DOW and SPX PnF charts shows a different story. If you change the box size to see a closer view of the action both of these indexes now have negative Price Objectives. That doesn’t mean the market won’t rally further but it does mean both have to break out to a higher high to regain positive direction on the charts. In the case of the DOW this means it must close at 10,380-10,400 to break the downtrend. The SPX must close around 1107 to do the same.

Today’s selling of some bulls and buying of some bears left me with this portfolio balance and bull/bear ratio.

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Where is the next Stock Market top?

Amazingly last Friday the DOW pulled back into the 10.3K area before rallying the rest of the day to close above 10.4K with the SPX closing above the all important 1108 area. Both indexes have now went slightly above the 50 DMA and the MACD signals for both went positive on the last rally from DOW 9830.

As I wrote last Thursday night, the market overreacted to the Fed raising the discount rate that evening. I had sold several short positions on Thursday when I saw the DOW clearly break into positive territory and was pretty concerned on Thursday night. It took a strong break above DOW 10.3K to get the markets out of the range bound area we’ve been stuck in since January’s decline.

The rally Friday took the ultrashort ETF’s I sold the previous day to new lows (excluding EDZ and FXP which I bought more of late Thursday as a hedge) so I bought back some SMN and FAZ to increase my hedge. I also sold some US Steel at 175% profit to increase my cash position. I’ve noticed EDZ and FXP have dropped but seem to hold more strength on a daily basis. My outlook is they could get cheaper but if and when the stock market does a 20-30% correction the ultrashort ETF’s will probably gain 50-100% very quickly. The 8% pullback we just had gave said ETF’s a rise of ~30% on average.

My personal outlook very near term is EXTREME CAUTION is needed, we’re only 300 pts below the YTD high on the DOW and probably very close to the Stock Market top short term. I remain hedged and plan to take profits and increase short positions on any mini-rallies going forward. There is a possibility we could set higher highs before this rally fizzles out but make no mistake, it will fizzle out again. Possibly in March, April, or May which fits both seasonal timing models and the Bradley charts. Let’s look at the VIX chart to see how the volatility index was affected by a 600 pt DOW move.

What is the “plan” going forward this week and into March?

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Will Fed Funds rate change tank the rally?

This excerpt is from the last Members Only blog entry here written last weekend.

“I tend to think we’ll see a rally up to DOW 10.3K to 10.5K followed by a huge correction starting in March/April/or May. This all depends on the Dollar’s moves vs foreign currencies and World/US news.”

The DOW rallied right up to 10,400 before pulling back slightly and this intraday high corresponded almost exactly with SPX 1108. The DOW closed slightly above the 50 day moving average and the SPX touched that area as well. Both the DOW and SPX MACD signals went positive this week as well.

Everything was looking pretty rosy till the release of the Fed Funds discount rate change after hours today which sent futures markets down.

From what I read the decision by the Feds to tighten emergency fund lending is a move to get banks to borrow at discount rates from each other. It’s possible this will help the lending situation and if you believe they know what they are doing then it’s probably a good overall sign of economic recovery.

Futures markets are not reacting kindly to the Fed news but many pro’s think the negative sentiment is being overblown.

We also have Options Expiration to deal with tomorrow and the return of the Chinese markets next week. What can we expect tomorrow and next week?

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Stock Market near term predictions

The next 2 weeks promise to be very interesting with China on a holiday all next week. From what I’ve read the Chinese markets typically do well after this holiday. Stock market predictions range wildly in the near term.

Experts are all over the map on very near term predictions. Everything from a very near term test of 9800 and a huge rally, to a very near term test of the yearly highs followed by a huge crash. I’m sure the truth will be in the middle somewhere.

Richard Russell the famed DOW Theory expert is very BEARISH going forward the next couple of years as are several other economic experts and financial writers. Technical support levels seem to be where programmed trades are occurring each day, trade the tape and not your emotions.

Berkshire B shares (BRK/B) have done exceptional since I suggested them on our FREE discussion forum  http://bestofbreedinvesting.com/board/. This equity is joining the SP500, watch it for pullbacks as it’s a good long term investment.

Here are DOW 1 month and 3 month charts where you can clearly see the support/resistance levels I’m discussing. The SPX charts look similar.

So what can we expect this coming week?

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Is the Smart Money buying stocks now?

After massive swings in the stock market the last few weeks and especially the last few trading days all investors and traders have to be perplexed. Can it be that the Smart Money who just got out of equities have decided the water is safe again based on a technical move downward or the news rumors about Greece’s credit crisis.

I’ve been rather amazed at the volatility myself but the orderly close to 200 pt ups and downs are normal in high volatility stock market weather patterns. I find it hard to believe that the Smart Money folks have decided this 4th and largest pullback/near correction since last March IS THE TIME to go long on stocks again.

It is very possible that programmed trades and hedge fund managers trying to jostle for the right position for the next 90 day or so of trading are causing the majority of the volume moves daily.

Here’s a few PnF charts of ETF’s I have and continue to like for the next few months or longer. While none of us have a magic crystal ball it’s important to note that these charts are what Best of Breed Stocks look like coming off of major lows in normal market conditions but these are all-

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LOOK OUT BELOW, Lower Lows ahead!

I expect overseas markets are going to panic tonight after today’s 100 pt selloff on the heels of Friday’s rise. We’re setting lower lows, the tide has changed. Time to cover your assets!

After seeing the DOW and SPX close at the lows of the day now I know buying TYP early today was good, should have bought FAZ and SRS at that same time. FAZ went up even more after hours as FAS is getting horse whipped again (after a huge rise from the lows last Friday). I did buy FAZ and SRS right before the close and watched them both go up slightly. Today the volume wasn’t huge but overall breadth was bearish, What’s to be expected in the very near term?

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