The Stock Market Rally that never ends?

As “Buy the Dip” regardless of the news is still occurring and we saw the market end last week on fresh YTD highs it seems nothing can stop this rally. There have been some major volatility swings as evidenced by the SPX bouncing off of 1194 to end at 1217 and the VIX is signaling a contrarian top. The best plays the last several weeks have been to either buy the dips each day or short the highs and sell immediately at the next days lows.

AAPL has been on an absolute rampage rally on the heels of earnings and future growth prospects. US Steel (X) seems to be basing out for a move up but could also dip toward 50 and long term this is one of my favorite stocks. I strongly recommend buying X on any major pullbacks. GS also appears to be consolidating after the fear based pullback, it may go lower but long term Financials are probably my favorite sector.

When these 3 Best of Breed stocks fail to hold support and the Financial sector falters there will be a pullback. The severity will be limited UNLESS geo-political events escalate on any number of fronts. EU credit concerns, China real estate bubbles, Middle East tensions, and the even more unpredictable volcanoes and earthquakes are all potential catalysts.

If you look at my previous blog you’ll see the SPX and DOW charts and notice how both bounced up almost exactly above the previous lows (column of 0’s on PnF charts). 

The DOW broke above 11.2K and the SPX seems on track to test SPX 1230 or higher, probably this week. My call for the rally to end at 11K was wrong and though all technical indicators are showing overbought conditions, the rally still persists.

How am I preparing for what has to be a top very soon as the SPX approaches the 67% Fibonacci retracement levels from the March 2009 lows (which is SPX 1230)? Join our FREE discussion board and share or learn with a group of great experienced investors.

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When will the S&P500 hit 1200?

The markets are still defying gravity and it seems the best strategy has been to sell shorts on the dips (or buy bulls). This is what I did last week which resulted in the big gains on Monday and Tuesday. GS rallied up to 180 and until Financials collapse this rally seems to be intact.

If the markets digest this Greek bailout news well it could mean a short term rise in the Euro/drop in the Dollar which means stocks will probably go up. Earnings reports may trump the dollar affecting market performance the next 2 weeks. The futures markets are up tonight and I believe we’ll see SPX 1200 this week, maybe a tad higher, and then a probable pullback on profit taking!

With the DOW hitting the 11,000 level briefly before the close last Friday and solid momentum in the Financial sector and Best of Breed stocks the stage is set for a little more upside IF earnings reports and forward looking forecasts are BTE (better than expected) starting this week. There is a good chance of seeing a little more upside in the next 2 weeks BUT there is a stronger statistical probability of seeing a 10-20% correction in the coming months.

The SPX support levels for a pullback or correction (which I posted in the previous blog) still stand with SPX 1180 as my 1st major support level NOW.

Here’s the PnF version of the current DOW and SPX charts. I adjusted the box size to show the last bounce off the most recent lows, classic higher lows and higher highs patterns still in place-

If you haven’t done so already please join our FREE discussion forum to read and share ideas on trading/investing with a group of very experienced investors. How am I positioned going into this week’s trading?

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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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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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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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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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How High can we go?

As the market has continued to climb for 6 weeks in a row more and more bears are starting to wonder if we are in a “real” rally. More earnings reports this week should clarify direction and my personal plan is to limit exposure when the market starts showing LOWER LOWS on the PnF charts I frequently show.

Caught a little of CNBC yesterday early evening and heard discussion on whether this rally took a slight breather for another big leg up. The bullish conversion factor hasn’t switched over positively enough yet to indicate a high (yet), the VIX has dropped to the lows of Aug/Sept.

If the SPX breaks and holds above 880 that will be very bullish. If it drops below 835 CAUTION and profit taking might be warranted.

The DOW seems to have support at 7950-8000 level, we’ll see soon enough. The SPX hit the 870 level and is poised to breakout further. Eyeing 850 level as support for now.

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

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

The VIX dropped to 33 (haven’t seen that in a long time), I still think if it drops below 30 we’ll see a wave of side money come in the market increasing upward momentum. When (and IF) everyone is giddy with the next 1000 pt rise it will be time to seriously take profits. A lot of people missed this bus and will be clamoring to get on if we see more upside this week.

Hope all invested folks are beating the market returns off the lows of ~+25%! A rise to DOW 9K is very possible near term.

Made another 5% week to week last Friday with 15% gain in 2 weeks. That’s a total average of 63.4% since the lows of March due to heavy exposure to ultra ETF’s.

Sold all GOOG at 399 Friday morning for a 30.3% profit. Looking at FSLR next, target is $150.

We are apparently going to rally some more unless earnings reports this week are incredibly bad. Looking at SKF, SRS, FAZ for short hedges when we do top out. All 3 are sitting on the bottom of stems at new lows and will probably go lower near term.