Market Outlook and Portfolio Strategy For the Next Few Weeks

After a two week hiatus (travelling in India and Nepal) and not having a luxury of watching this market on a tick by tick basis as I normally do, I finally had a few minutes to put some my thoughts together. As usual, I try to examine the market action trough a prism of sentiment, fundamentals, and technicals.

Sentiment: Money inflows continue at a decent pace.

The rally has propelled the markets to a very interesting inflection point. Fueled by 'green shoots' and improving sentiment among the investors, mainstream media, and blogosphere - what started as a traders’ rally has now a potential to mature into a broader, investors' rally. For the second month in the row, the latest data shows continuation of the flow of money into stock funds, showing the biggest sequential inflow of funds into mutual funds assets on a percentage basis and on an absolute basis since at least February 1998. I have repeatedly made this point over the past few weeks, that with trillions of idle cash ($3.8T by some estimates) on the sidelines, the underperformance anxiety will eventually cause a buying panic. The bears and skeptics will throw in the towel and will join the rally, providing the second phase thrust to this bullish move. Even a small portion of this money finding its way into the market, let say $400-$500 billion, could be the catalyst to start a buying frenzy.

Technicals: Consolidation near key resistance levels, but the uptrends are all intact.

During the last few days the market's advance have stalled near the key levels (see more on this below) and we will likely see buyers and sellers duke it out here prior to seeing any kind of resolution. The major indexes reached their respective resistance levels, pinning the action right below these levels, as the market consolidates and digest its recent gains. Volume is still pretty average, despite the additional inflows, although Nasdaq outperformance signals wider participation. However, in the absence of fundamental or major economic catalysts over the next few weeks, we should pay attention to technical’s, since a breakout above key levels may be the start of another leg. But for now, ah, we are stuck in the good old trading range.

So let's examine the charts on the two key indexes DOW and SPX.

The Dow, after replacing two of its underperforming components C and GM, with CSCO and TRV, now has the weapons to push through a major resistance at 200 MA on a monthly chart (~8756). At the same time the 200 day MA, is in the sights, at 8817, but it has some major work to do here, especially considering that the near term indicators are overbought. The monthly stochastic, however, is in a great shape, just crossing from the severely oversold levels. On a down drift, we can lose 400-500 points on the Dow without causing a major technical damage. For the

The key levels for DOW: Support - 8225-8275. Resistance - 8817-8850


The SPX, has already poked its head above the 200 day ma, and seems to be in a well defined daily channel. But it too, is approaching a lot of overhead resistance at around 940, so expect a battle here with at least a few attempts to tag this level before a real breakout. The near term momentum indicators are also losing steam and no surprise if we see some more consolidation before a breakout.

The key levels for SPX: Support - 900-910 , Resistance- 940-950


Fundamentals: Maintain caution as we approach the Independence Day!

From the fundamental perspective, as I posted before, we are approaching a seasonally difficult time for the market. I am concerned that the Q2 results and Q3 guidance will be disappointing, given higher expectations of economic recovery and lack of favorable factors that helped Q1 results. The positive reactions to Q1 results were all about low expectations, contributions from lower energy and raw materials costs, plus the impact of significantly lower SG&A expenses. With rising energy costs and investor expectations that are now discounting some topline growth driven by economic recovery, we could see some disappointment following the Q2 results. Also, many companies have already severely reduced their operating expenses, so broadly speaking, we should not expect much more in terms of operating leverage from additional SG&A cuts. Smarter investors will likely start bailing ahead of the results, so ideally you want to be careful going into the July 4th holiday weekend.

Portfolio Moves and Strategy:


Currently, I maintain positions in a number of commodities and energy stocks, all of which have been hedged by selling June calls. If my stocks don’t get called away on the 18th, I will likely start selling at the end of June and to reenter sometime in September or October. In the mean time I will maintain a few long term positions and trade around some of the positions I know well.

TBT – will be adding additional short Treasuries position on a pullback, as concerns about fiscal deficit, never-ending supply of paper dwarfing any purchases by the FED, and re-allocation into riskier assets all putting pressure on the bonds. I am not chasing the move now, as I do hope to see bonds bounce during a market pullback, providing a better entry point. At $50-$52, I will put a much larger position.

KEY- bought shares of KEY, although I am not really focusing on financials, I wanted to pick up some shares here for a trade. Trading at less than 1/2 its book value, the valuation more than compensates for deteriorating credit quality and capital raise concerns. Stock is oversold and was upgraded by RBC today, which is helping my cause.

UDN – reluctantly added a little more to short US dollar position, I think there may be better levels to enter this trade.

BTU, WLT, CNX – put small coal position back on. China has been buying record levels of met coal from Australia. Given how much production has been take out lately, this should provide some pricing support to major US met coal companies.

OIL – I am not chasing oil here, and turning a bit cautious as contango has widened again. I think after Goldman’s $85 oil forecast is digested the shorts that scrambled to cover today will put it on again. I am an OIL bull, and would look for a pullback to add aggressively, but for now, most of my positions have June calls written against them.

GOLD – I maintain CEF, and the only exposure both gold and silver. I continue to favor Silver, because of much cheaper valuation, but Gold seems to have more interest here. I think gold is overbought and will crack if the USD moves gets stronger.

SVR – sold position, as the stock has lost momentum and seems a bit ahead of itself.

Final thought: My portfolio is prepared for a pullback and although I still maintain a decent exposure to equities, I am compiling a list of top ideas that I want to aggressively add on weakness, as long as we don’t violate the uptrend. I will be publishing my Buy Wish List later this week.

Happy Trading!