Taking a quick look at technicals

I have decided to take a closer look at the market technicals in light of Friday's selloff.

For some time now, we have been in an upwardly sloping 10% (or so) trading range. This is true for all equity indexes, although there have been some variation as of late. The long term trends are still intact, making the bull bets profitable, but one can certainly make money by trading against the main trend, as it approaches extremes. All indexes are overbought now and are trading near the top of the their respective channels. This usually warrants caution, especially with Dubai’s headlines dominating the news. Although, its not a reason I consider fundamentally meaningful for the long term market trend, over the near term, the nervousness and stretched technicals may present a delcine of a few percentage ponts. I would use to very very selectively add on a shallow pullback, but not really looking to short here, unless you want to just hit and run using leveraged short ETFs.




Russell 2000 index – continues to be the biggest underachiever lately, down 6.5% from recent highs of 623. The range is well defined by 560-620 channel. There is some support near current prices, at around 580, a near term support you should be watching. If we hold it, then you could conceivably add to IWM. A break below could mean a pullback of another 20 points, to the bottom of this channel. This pullback would translate into roughly a 10% decline from the double top that was formed in September/October. The underperformance should not be surprising, given the index is up 82.4% since March lows, more than any other broad based equity index. I am not yet sure, it means that the bull run is over.




SP500 – the cash index has been struggling to move above 1100, while holding 1030 lows quite well. I think we are likely to stay in this range through the end of the year. The index is currently overbought and should not surprise anyone if we give back some. There is some support at 1080, which should hold, but Monday will be a good test.


Finally, a quick look at Nasdaq and the Dow. The Comp has support near 2025, where we were just a few weeks ago. The 2200 seems to be the lid, for now. The Dow, is comfortably above 10,000, with decent support at 10100. At the same time, we need to break above the 10,500 level in order to continue its bullish march. Frankly, I don’t see this as a likely scenario until well into next year.

So with all the major indexes near the channel highs and overbought momentum indicators beginning to decline, I see an organized pullback and pause to near term support levels, where we would need to reassess the situation. Today’s action is constructive, as we rebound from the lows of this morning, but you can never draw meaningful conclusions based on holiday market action.

Black Friday – Time to go shopping?

I’d say buy this dip, especially, if you have been sidelined. Forget Walmart's and Best Buys’ door busters, power on your computers and take advantage of some real bargains out there.

The geopolitical headline is pressuring the risk trade this morning, with Dubai sovereign fund requesting to restructure its debt. The markets in US are down, following the selloff in Asia and Europe, while we were feasting on turkeys yesterday.

So is this another markdown opportunity and should we get involved? It depends. It is not a time to buy indiscriminately. I will explain a bit later.

I truly believe the headline itself is not a significant catalyst to bring the market to its knees. Geopolitical events, generally speaking, are short term, flash in the pan events, with 8 out of 10 times presenting an attractive opportunity to add to portfolios. Nothing will likely change. Dubai’s lenders will figure out a way to restructure its debt. It’s in no one’s interest to let them default. Also, despite the scary headlines that Dubai has $80-$90 billion in debt, only a few billion is due in the next 12 months. A drop in a bucket. So by itself, the event is insignificant. But, one should not forget a ‘butterfly effect’, as economists would point out. History buffs would also remind us that many of the world's cataclysms started with small and unimportant events. At least, viewed as unimportant at that time. Recall how the WWI started with the Sarajevo assassination of a relatively unknown political figure, Archduke Franz Ferdinand, heir to the Astro-Hungarian throne. The history is full of such examples, but I digress.


At first blush, a worldwide selloff is likely just an excuse to take some profits, as nervous investors have already been uncomfortable with levels of certain assets. Typically, in times of uncertainly and fear the US currency gets a bid and as we have witnessed many times over the past few months, strong dollar sends the equity markets and commodities in the opposite direction. Not what we learned in business school, but once again, I digress.

So I am expecting a fairly typical selloff, with commodities and financials leading the way down. It is hard to say whether this would shift the sentiment scale into the fear camp and cause irrational selling. Watch for bear gurus, to come out of the woodwork to rehash once again their bearish arguements.




What am I looking to do? I think I will take advantage of this light volume selloff and selectively add to my portfolio. I will focus on stocks that have ran away from me, and buy back some December calls I wrote over the last few weeks. I am not buying financials as it is not really known at the moment who might be on a hook for Dubai’s debt. Even with restructuring, these assets may take a pounding. It is also unknown what ridiculous assets are backing up these loans – anyone wants to buy an indoor ski resort? I am not planning to add to my emerging market exposure – as it will likely be the most volatile sector. If the risk trade gets reassessed, the first exodus of money will impact the emerging markets.


I am not buying gold either. Gold has been clearly acting differently than one would expect today. Instead of attracting money flows, as typically happens in times of uncertainly, it is for sale today, behaving just like other risky assets. Take mental notes, goldbugs.

My quick and dirty Buy list: APC, NKTR, MWA, ANR, XTO, CELG, AKS

A Pause is Likely. Selloff? Naah!

Once again the market touched 1100 on the SP, hitting my year-end target (+/- 25 points). This has proved to be a very clear technical barrier which also represents a fairly valued market territory at roughly 15x forward earnings, especially given the early stage of economic recovery.

Contrary to many skeptics out there, I don’t expect a major selloff after hitting this target. A pause and consolidation are likely and would be a typical market reaction before we can overtake such a tough overhead resistance and move higher. I don’t expect the market to move much above 1125-1150 either, and as I have been saying for months now we are sort of in a 10%-15% trading range. The best strategy in this type of market is to buy aggressively oversold high beta stocks, with decent fundamentals, on pullbacks to bottom of the range and to sell calls or partial positions as we get near the upper boundaries, like we are now. Shorting indexes in this tape is just not a smart strategy, you will be better off shorting very overbought individual stocks to exploit the volatility.

I see the fear of underperformance and greed of money managers that have not been paid in over a year as a powerful combination to support the market in the final two months. The recent data should provide enough confidence that we ARE in the early stages of economic recovery. Even the housing is beginning to show signs of stabilization and improvement. The next leg up would likely be a reaction to a more robust economic improvement. We would need to see the topline-driven margin expansion, and sustainability of cost cutting efforts, as productivity remains a real engine of earnings growth. However, I continue to be highly mindful of any changes in sentiment, as the medium term expectations about the robustness of this recovery are getting a bit on a high side. Unless it continues to be balanced by the same degree of pessimism that provides a nice wall of worry for the market to climb, we may be setting ourselves up for some disappointment.

There is a real possibility that we might see negative returns in the first quarter of 2010, with some down drifting lasting through the end of February/early March 2010. This could be the last real opportunity to get in for yet another leg up in the market, as analysts start moving their forward estimates to 2011, making the valuations seem more attractive. Then watch for the likes of Roubini and Kass (and other vocal bearish prognosticators) to throw in a towel or become irrelevant, in the next few months. They will likely cause an army of ‘glass-half-empties’ to finally enter the market.

The main threat I see for a real selloff (not just a small dip as we have been seeing over the last few months) next year is the Fed. The Fed has been a non-risk factor thus far the investment process, but it will likely to change next year, as the unemployment stabilizes and the need to support the crashing US currency becomes a matter of national priority for politicians as they no longer debate the merits of nationalized healthcare. We are already seeing other Central Banks’ interventions to prop up the green back, but the Fed could do it easily if they chose to by just raising rates. And since no one right now believe that they will be raising rates anytime soon, this could potentially be a pretty nasty catalyst for a market selloff. I do hope that they will take their time and will slowly articulate the conditions that would necessitate the change in the interest rate policy, telegraphing their intentions well in advance.

So to summarize, I see opportunities on the long side for the rest of the year and remain firmly in the dip buyer camp. I see no real negative catalysts and completely disagree with those still clamoring for a substantial selloff. At the same time, I am not complacent and remain vigilant about managing my risk, especially as we get near critical technical levels as we are now. I continue to watch the US dollar and commodities for direction of the market on a daily basis, but see this more as a trading and tactical weapon. As long as the sentiment remains in check and Fed behaves the only place to be is equities. Additionally, the 25bps return on cash and the overcrowded bond trade is not likely to attract any real capital.