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.

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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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SPX 1110/DOW 10.3K support or resistance?

After 2 days of heavy selling this morning there was a smaller move downward to DOW 10,297 before the stock market bounced upwards. Looking at the PnF charts this is actually the picture perfect place to see a reversal. The SPX briefly dropped below 1110 before finding support and though Advancers lag behind Decliners the ratio is much improved today for the bulls.

The DOW crossed below the 50 day moving average for the 2nd time since July (which ended up being a great buying opportunity).

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SPX 1000, Where do we go from here?

The charts say it all, the thesis for SPX 1000 was proven against many odds and patience paid off. We also hit my high term target of DOW 9400. I’m very dubious of another serious leg up in the rally at this point and now the Bullish Sentiment Indicator is peaking towards a high. With all of that and geo-politics in mind I’ve taken profits and implemented Plan C.

What is this infamous Plan C you may ask and those who regularly read our Forum know the answer?  It’s to sell 1/2 to most of the ultra leveraged Bull ETF’s and buy their opposite ultra Bear ETF’s to hedge remaining Best of Breed Stocks and ETF’s. Running about a 30% short hedge position now with about 45% in bulls and remainder in cash.

I’m hedging with EDZ, FAZ, SRS, FXP, TZA which are ultra shorts of Emerging markets, Financials, Real estate, China, Small caps. With the portfolio weighted in this manner I won’t get the huge 2-4% gains of late which is fine, my goal is wealth preservation till the direction is clear. We are very close to a near term top and if I can manage to gain .5% daily returns I will consider this successful. All of these bear ETF’s are at the BOTTOMS of major stem moves, they could go a little lower but the upside potential is huge on a pullback or correction.

Here are some eye opening  long and short term PnF charts to give perspective-

On Friday when the DOW broke above 9400 (which was my high end target) I sold a good chunk of bulls and bought more bears. These were either new or remaining shares and regular readers know almost all of these provided 100-300% profit coming off the March lows. Here’s the breakdown.

CIT- sold 1/2 of position at average profit of 120%
FSLR- sold 1/3rd at 28% profit
FAS- sold 1/3rd of minimal remaining position at 109% profit
URE- sold 2/5ths at 65% profit
TNA- sold 1/2 at 48% profit
UYG- sold 2/5th at 43% profit
UYM- sold 1/2 at 34% profit
USD- sold 1/2 at 32% profit

Still holding shares of the following Bulls-

AAPL, GS, X, FSLR, POT, CIT, FAS, UYG, URE, UYM, USD, TNA.

I’ll probably have to adjust my Bull/Bear ratio via weekly buying or selling to manage Plan C’s goal of wealth preservation with slight gains going forward the next few months. If there is a huge break to the upside I’ll dump a handful of shorts or conversely dump some longs if we in fact see a major pullback as I anticipate going into early November.

The daily/weekly data, volume, PnF charts, and Technical support/resistance levels  will be my guiding light.

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Market Update

We finally got the long awaited rally and the returns have been “record setting”.  The big question is whether this continues after normal pullbacks or not. 

Lots of economic reports coming out this week and I have NO clue which way the market will react. As BT often says “just go by the charts” when there are too many unknowns. Looking at the major indexes and overall strength I think we’re going to pullback a bit more and then zoom again. The SPX has support at 800ish but if it breaks and drops to 770 I’ll be looking for the exit door. The DOW has support at 7600 but if it breaks down to 7350 I’ll be selling. On recovery rallies it’s sometimes hard to spot the trend changing as “pullbacks” are normal. In the past I’ve bailed on a small pullback using stop limits and later regretted selling the position. Looking at the longer term charts going back to the 1990’s it sure looks like we put a bottom in. There is a STRONG possibility that DOW 6500 will be tested again later this year and that is the PERFECT time to go in heavily. This recent rally showed me which sectors and equities performed the best, I’ll be betting these same sectors do it again after another re-test (if the market doesn’t fake us out and NOT re-test). I would venture to say any buys around DOW 6900 +/- 200 pts will be outstanding purchases given the fullness of time. Some of the positions I bought at the lows in November are now double baggers but I sold most of them after the January rally. Look at NUE, MOS, MON, POT, RIG. I had all of them at the Nov lows and wish I had kept all. I did do very well on the keepers though and hindsight is 20:20.

I’ve been taking a lot of time during this rally to ponder performance after major pullbacks and so far this rally has far outperformed any I can recall the past few years. Of course we’ve moved a lot more as well coming off the Oct 07′ high. Just proves the axiom “the steeper the decline, the steeper the recovery” and we have a lot more to go if DOW 9K is indeed the target area as many surmise. Some of the same folks also surmise another re-test of sub 7K before this is all over with.

Now I know that a DOW move from 6500 to 7900 was worth ~45% average return in my portfolio in 3 weeks. I also know that if I was leveraged differently it would be more like 100-150% return. I’ve published my holdings here and on my blog many times, a combination of Ultra ETF’s across many sectors and Best of Breed Companies. The returns on AAPL, GOOG, FSLR, MOS, X have been grand but are dwarfed by the returns in the Ultra ETF’s.

We’re at a point where proper planning can make the difference between a double bagger or a quadruple bagger (200% or 400% returns). Not to be greedy but on major pullbacks going forward I do believe it will be easy to snag some MORE larger prey. Looking out 20 yrs we’re probably seeing prices now for what will grow 1000% or more.

If you’re a younger investor (or a greedy one like me) it’s not hard to set yourself up for major profits right now. Look for the next major dip (be patient) toward DOW 7K and buy Best of Breed Companies or Ultra ETF’s.

Actually there are a lot of stocks and ETF’s that have doubled or more coming off the March lows. I wish I owned them all, LOL. It’s difficult to pick and choose amongst such a wide selection.

Look at TSL, FCX, almost all baby solars, GS, many financials, RIG, POT, etc…………. It’s crazy to worry about dividends when you have equities giving more than a year of normally great returns in a few weeks.

No matter what we’ll probably test the recent lows at some time and that will be another MOABO (mother of all buying opportunities). If we pop some more and approach DOW 8K I’ll have an itchy trigger finger. If the VIX drops into the 30’s I’ll do some yard work. 

I’m officially calling DOW 6500 a MOABO (don’t know about the duration though). My returns have been bouncing from 35-46% coming off the lows. Was up 46.27% Friday morning before the pullback which gave up 4.6%.

Percent Returns as of Friday morning, March 27th.

ISRG- 12.25

GOOG- 15.72

AAPL- 22.5

URE- 22.6

FSLR- 26.3

X- 36.8

GS- 40.2

USD- 40.8

DXO- 49.5

UYM- 53.1

MOS- 57.3

ERX- 58.1

FAS- 62.4

BGU- 73.7

TNA- 81.1

UYG- 87.8

Good luck to all, be patient if you’re not in the market now, be  cautious if you are.