And the beat goes on..and the trading range market continues

Give the masses what they want. The masses were looking for a summer pullback, with consensus expecting 10% selloff on the average, and we actually witnessed an intraday 9% high-to-low move on the SPX (from a high of 945 on 6/11 to the last Wednesday's intraday low of 869 on 7/8). In our previous posts, we repeatedly mentioned that investors we were looking for a 5-10% pullback before committing new funds. It appears that the recent selloff may have satisfied them. We would've preferred to see, a less volatile selloff, taking at least a few weeks to complete, but this was more of a wishful thinking on our part.
The short term technicals have improved, Stochastics and RSI were both oversold last week. We are encouraged that the trading range held the 870 support. Despite testing the level several times and briefly violating it intraday on 7/8, buyers managed to hold off the onslaught of bears at this important and highly watched level. VIX remains subdued, hitting a 10 month low yesterday. The 'fear' and risk aversion trade worked well when the indices were close to the resistance, but the trading range trading continues - and we gingerly bounced from 870, feeding off the optimism from better than expected INTC, GS, and a number of other companies. We sort of expected the actual results to come in line or above expectations, but the positive outlook and improved visibility provided by some of the CEO's caught us a bit by surprise. The combination of solid headline results a number of somewhat more positive economic headlines, boosted investor confidence, translating into short covering frenzy we are seeing this week. Well, we were correct, thus far, not to short them market for more than a quick trade.
Yes, we seem to have dodged an economic collapse, and we are definitely seeing signs of improvement in the economic environment. Having said that, our belief is that the improved fundamentals and corporate results have pretty much been priced it in at the current level. For forward valuations to take a step up, we would require to see more consistent and broader recovery, not only in China and US, but in Europe and the ROW. Thus we are most likely remain stuck in a trading range ~870-950, at least until we see a decisive move above 950 (or a breakdown below 870). We may have our answer in the next few days. Until then, there is no reason to load up, as we are within a stone throw of the upper end of this range. The breakout will put two additional price objectives in play for the SPX: 1st - 1010, and 2nd - 1070.

See the S&P chart below.



Consistent with our theory, that we are still in a trading range market, we continue to favor a strategy that uses a combination of swing trading, beta leveraging/deleveraging, and sector rotation. In my next post, I will provide additional information on this strategy, and finally, (yes, finally!) publish the Maven Top 50 Focus List.

Good Trading!