Trading Armageddon

As most are aware the DOW is now down ~1100 pts from the year to date high in April and both the DOW and SPX are trading slightly below their 200 day moving averages now. Failure to break above the 200 DMA in the major indexes this coming week will be an ominous sign for the bulls and world stock markets in general near term with possible heavy declines leading into the next earnings season.

If the 50 DMA lines cross below the 200 DMA’s that’s the infamous Death Cross signal that has typically led to major market declines. We all know companies have reported stellar earnings but the stock market is a forward looking mechanism trying to predict where things will be 6 or so months down the road.

The ~10% correction was instigated by fears over Greece’s credit solvency and further inflamed as the situation appears to be spreading to Spain, Portugal, and today even France issued a warning about their triple A credit rating. A double dip recession warning was also issued by China today which is the main country holding world markets together.

Couple all of this with military fears in Korea and the Middle East and I don’t see a bullish outcome going forward into summer.

There is a chance of more relief rally upside barring any more ultra negative world news this week AND a much better than expected US employment report this coming Friday. I’ve been cautioning folks to take profits on rallies, go short, go to cash, or put your money in bonds since late April at DOW 11,000.

If we do see more upside it looks like SPX 1150 is major upper resistance and I’ll be shorting any rallies below that level for some time to come. The VIX (Volatility Index) is showing a pattern of higher lows and higher highs congruent with fear in the options markets and traders buying protection against further downside.

Regular readers here and on the Best of Breed Investing discussion forum know I’ve been an advocate of using ultrashort ETF’s as a hedge since late last year and recently many of these short positions rallied up 20-40%. I’ve taken some profit but remain heavily hedged as my position for Trading Armageddon (and I don’t mean that in the biblical sense). The Best of Breed stocks I prefer did great in the historic rally from March 2009 and recently I sold all positions in AAPL, GS, and most of US Steel. All were at 150-250% profit in the original shares.

Hoping world governments will be able to pull out of the growing debt crisis by printing more money and putting the US deeper into debt isn’t a viable investment plan.

Members of Best of Breed investing are kept up to date via messenger or discussion board on which trades I’m placing and my overall bias for daily/weekly market conditions.

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Ringing the Bell, when to take Profits!

Most of us have wondered when will this historic rally be over and when should we Ring the Bell and take serious profit or head completely to the sidelines. The old adage of Sell in May and go away works over long periods of time but hasn’t worked too well the last couple of years.

Some folks I highly respect make it a point to follow the 30:30 rule regarding when to take profits out of the stock market. When an equity position is up 30%, take 30% off the shares off the table. Last year I bought leveraged ETF’s and Best of Breed Stocks that gained 100-400% during this historic rally and I took a great deal of profit along the way. Now I’m down to 7 bull positions and ready to trim them further on a minutes notice but I still have a small handful of BoB stocks that are up well over 100%. My short hedge is now set up and ready to be increased when this market does roll over and finally give us a 10-20% or greater correction.

We’re seeing historic volatility and stock market rallies, historic changes in our Government, and a lot of general confusion as to the direction and what is best for our country now. The Vote today on Healthcare Reform could cause a massive stock market correction or just a little 2-5% pullback. No one knows what will happen but with the RSI signals at peak levels along with bullish to bearish sentiment and 90% of the SPX over the 50 day moving average IN MY OPINION the stock market is begging for a average to above average correction downwards.

Until we see some high volume selling across every sector of the stock market this rally could continue but I highly suspect last Friday was a great time to start going short and take some profits off the table.

Personally I watch the Financial sector the closest and it started rolling over last Thursday with almost every Best of Breed stock and bullish ETF down even when the DOW peaked above 10,800 early Friday morning. The SPX came close to 1170 before pulling back slightly as well.

Members of Best of Breed Investing have access to my latest Trading Plan with a early morning update tomorrow. We also share trading info in real time via MSN Live and I send email updates during the trading day as well. The BOBI discussion board has a general FREE area where general outlooks are shared and a Members Only area where I post daily results, trading plans, future outlooks. To access any of the Members Only info join Best of Breed Investing today, the first month is FREE.

Be careful with your investments, the market is fast approaching an inflection point with probable relief rallies along the way. The key is to watch for a formation of LOWER highs which is confirmation of a trend change.

Blessings to all!

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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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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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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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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How to make money in almost any stock market condition!

After the historic rally and the last 4 weeks of bearish pain for the bulls (not to mention a 900 pt drop on the DOW) we finally saw major capitulation selling  last Thursday and early Friday followed by a big bounce. The SPX hit an interim bottom very close to 1050 the pro’s had predicted.  Most investors hate this volatility, most traders love it. Who hasn’t asked themselves “How can I make money in almost any stock market condition?”. Daytraders sometimes do great, long term investors sometimes do great but with radical 200 pt daily swings it’s almost impossible for long term investors to get ahead. How can you hedge your bullish positions to prevent catastrophe because of sudden unexpected selloff’s induced by world market panic? Is this even possible. We’ve proven that it is thru a properly allocated and balanced portfolio with some hedges on the side. No one can pull the trigger on buys or sells fast enough or in the right direction to keep up with programmed trading and market manipulation so that was the premise that led me into hedging strategies or Auto CYA Mode as I like to call it. A form of this was first used at market peaks last August successfully to decrease volatility thru the oscillating market in Sept/Oct.

One very good thing worth noting is at the lows last week on many days my Best of Breed Stocks were up showing why they are Best of Breed’s!

Unfortunately last week the DOW dropped below the 10K level ON HEAVY VOLUME SELLING and went down to 9830ish as I predicted in my daily discussion board posts. I loved the bounce from those lows on Friday, that day I went from up 1% at the lows to up 2.59% at the close.  The insane VIX volatility and high volume selling led me to

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DOW 10.2K inflection or correction

Unfortunetly the DOW didn’t quite hold 10.2K this week until the close till today. Does this mean we reached an inflection point to re-test the highs based on BTE earnings from most companies and the Feds keeping rates low OR does this mean we are on the brink of a major league correction and hanging onto DOW 10K support levels with clawed fingers?

The SPX bounced up off the lows many other pro’s predicted around 1084. We’ll soon see if the 50 dma for these two major indexes can be breached upwards again. Tech stocks seemed to get a rise out of AAPL earnings and their new product introduction today, time will tell as Semi’s are down quite a bit from the recent peak.

The DOW came close to hitting my interim low prediction of 10,050 +/-50 pts before bouncing up over 100 pts from the intraday low after the Fed meeting minutes were released. It still might get there after the “State of the Union” address tonight. My drop dead line in the sand to reduce beta risk is- 

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DOW 10,700 boom or bust?

As you can see from this link the DOW (and SPX) printed a new 15 month high before a 100 pt ”profit taking” reversal last week. We’ve all read the stories, pro’s and con’s on Intel and JPM’s better than expected earnings. The Sell the News event distressed a lot of investors, trader’s, and analysts but after such an historic runup to DOW 10.7K a little breather is normal. The long term uptrend lines haven’t been broken and a lot of big cap Best of Breed Investing companies will be reporting soon.

http://stockcharts.com/def/servlet/SC.pnf?chart=$indu,PLTADANRBO[PA][D][F1!3!!!2!20]&pref=G

I did take the opportunity last week to sell SRS at 8% profit, sold TNA at 25% profit, and bought SMN (ultrashort of materials) to hedge UYM and X. I also bought some FAZ to hedge my FAS and GS holdings. EDZ is my largest hedge position against shares of EDC (Emerging markets bull).

Many analysts are saying Emerging markets were oversold on profit taking and will bounce. The earnings and economic reports due this week will be major catalysts to the general direction and momentum in the week’s go come.

Still holding shares of AAPL up 139%, GS up 122%, X up 235% that were bought back at the March 09′ bottom or in Nov 08′.

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DOW has strongest 2 week gains since 2000

My apologies for not updating this blog recently but I do share intraday commentary and my personal investing/trading info on the forum at- http://bestofbreedinvesting.com/board/ 

As regular readers know we were in a quandry regarding the highs of the year that peaked in June followed by a 4 week correction (during which time I was buying more Best of Breed Stocks and bullish ETF’s). The last pullback to DOW 8100 sent a lot of folks running and the shorts were in ectasy. I recommended the contrarian approach and bought RIG and POT. Earlier at 8250ish I had bought more USD, UYG, UYM, URE, ERX, FAS, TNA, BGU after taking 20% of them off the table TWICE during the first runup. Booked >100% profit and in some cases 250% profit in almost every ETF position during the rally.

At the 2nd visit up to DOW 8800ish most pro’s were saying we had seen the high for the year or at least for awhile and recommended selling stocks/going to cash, buying puts to protect them, or going flat out short. The Bradley charts were telling me otherwise and I also strongly believe the last leg down in March was pure panic, not related to actual economic reality. The 4 weeks after this were not fun but I held to the thesis and bought on the dips and when earnings were released combined with pro’s going bullish on Financials, my thesis came true and we rallied above DOW 9000.

http://stockcharts.com/def/servlet/SC.pnf?chart=$indu,PLTADANRBO[PA][D][F1!3!!!2!20]&pref=G

What’s next for Best of Breed stocks and the market in general? Some say DOW 10K in the next week or so, some say a straight rally to SPX 1250. My best estimate is we’ll see DOW 9.2K ish with a chance of 9.5K. I don’t think the SPX will go above 1000 and certainly not above 1050 before we see another correction in the August thru October timeframe.

Started building a hedge position with FAZ (ultra bear Financial ETF) and BGZ (ultra bear Large Cap ETF), these positions will probably go a little lower in the next week but have huge upside potential now that they are all on the lowest lows of the year. Caution is the byword on these ETF’s as they are extremely volatile and can move 20% in one day.

It’s possible I’ll be wrong on an upcoming correction but looking at the straight up stems in the PnF charts tells me otherwise. When Bullish sentiment starts peaking, Side money floods in, it’s time to look for a pullback/correction. Suspect the Fall lows will test DOW 7800-8000, no lower than 7500 (unless a military conflict breaks out) followed by higher highs by year’s end. If you bought at the lows in March and don’t need the money now you might want to shut off your TV and go on vacation till the end of November.

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Blessings to everyone and I hope your trades/investments are profitable.