Market Gaps Down ... Ask Questions Later

I'm cleaning house with the model portfolio on the market gap down today... ask questions later. I'd rather scale my long exposure back in when potential for market upside is more evident. We've tried to get above 1,120 on the S&P 500 and have been rejected back below 1,110 numerous times already. The model portfolio is quickly down to a 16% long exposure from 75%. I'm not too excited to go short though while we're still above 1,084 on the index. I'll probably pick my spots going short on issues like NUE or SOHU. But I'll wait for proper setups and utilize appropriate position sizing.

I'm selling MOS on a breakdown from the small flag-like pattern.

Also getting out of DGP after the dollar rally thumps gold.

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Taking profits in SWK on a properly timed breakout trade for a 4% gain.

Selling AMSC... should have took profits on this one yesterday... too greedy!

Holding on to AGO (5% gain) after breaking out from short-term downward trendline. Altucher the catalyst?
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Silly Season For Dollar, Oil and Gold?

With all the hoopla about the recent strength in the US dollar, two of the prominent beneficiaries of fiat weakness in gold and oil have their recent uptrends thrown into disarray. Market Club is out with three videos on these three asset classes (click on images below to view short videos), detailing just how the technical picture for all of them could go either way. Frankly, I would personally think that it is a huge sideways trading range for all of them for the meantime. Oil was the first to disappoint, and I had previous posts pointing out how the prevailing weakness in oil could spill over to stocks and gold. Recently I'm even more disappointed with the move in gold, as I had expected the 50% Fibonacci Retracement level to hold (that was my worse case scenario). Market Club has their proprietary trade triangle technology, which are a very reliable indicator of short-, intermediate and long-term trends (quite similar to how moving averages work in my opinion). Based on their trade triangles turning negative on the weekly for gold and oil, and inversely turning positive for the dollar, but with the major trends still intact, it's quite a stalemate for all these asset classes.

Dollar video
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Crude Oil video
Gold video

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Waking Up To A Stronger Dollar... What Now?

The US dollar is up about 0.7% overnight, and it looks like we're gonna see some follow-through weakness in the stock market as of the moment (US futures, Europe and Asia are down). The US dollar gains come on the back of Fed comments that the economy is improving and that it will slowly wean the economy off of some emergency liquidity measures it implemented at the height of the financial crisis. From Bloomberg:

"The U.S. currency gained against 15 out of 16 of its most- traded counterparts, advancing 0.9 percent against the euro and 0.4 percent versus the yen as of 5:10 p.m. in Tokyo. The euro fell after Standard & Poor’s cut Greece’s credit rating. The MSCI Asia Pacific Index dropped 0.9 percent while futures on the Standard & Poor’s 500 Index lost 0.4 percent. Europe’s Dow Jones Stoxx 600 fell 0.6 percent to 248.92 at 8:10 a.m. in London."
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Short-term, it would be hard to predict if this morning's moves in both global stocks and the US dollar is the start of a trend reversal or just a short-term blip within the recent trend. For all we know, it could be just a big sideways pattern for both stocks and the US dollar for the next few months, but still a sizeable shift from the no-brainer-dump-the-dollar-buy-anything-else-risky trade that has been dependable for the past few quarters (the sideways scenario would be my personal bias for now... of course I change my mind as the market dictates). For now, I would suggest watching key support of 1,084 for the S&P 500, and key resistance of $77.50 for the dollar index (which is more or less where the dollar is trading at right now). Assuming that the inverse relationship between stocks and the dollar hold, a sustained move by the dollar above this resistance level could portend weakness for stocks in the short-term.

Looking at it from the fundamental standpoint, I've written a few posts regarding a potential end to the inverse correlation between stocks and the dollar as both the prospects of an improving economy and a rate hike scenario creeps in (check out "US Dollar Rallies; Should Equity Investors Be Worried?" and "Prior Rate Hike Cycles And Their Effect On the Stock Market"). To tie things up, my logic behind all this is that the current rally in stocks is fueled by liquidity, which is in turn partly or even mostly fueled by a weak dollar (thus the dollar carry trade). This is why most bearish pundits are calling for a market crash (possibly testing the March 2009 lows) as the current rally can be considered speculative in nature. But don't forget the fact that we are seeing some improvement in economic numbers, from jobs to industrial production to housing figures... and because of this some analysts are calling for a rate hike by the Fed sooner than later. For now, dollar strength can lead to a correction in equities, thus wiping out those speculating on the dollar carry trade to buy risky assets. This could open the door for the stronger hands, those who see a true economic recovery, to come in and buy stocks on the dip.

This scenario could in turn eventually lead to strength in both the stocks and the dollar, or maybe the dollar not being such a big deal to stock market performance anymore, breaking the monotony of the past few quarters. As I said in my previous post, this development might be the signal that there are no false starts to both the stock market and economic recovery. I'm just throwing this scenario out there in case it materializes, but I am in no way guaranteeing it, nor am I trying to precise predict when this will happen. But this seems to be the most logical scenario given what the stock market has done over the past few quarters, the economic data that has come out, and the recent strength in the US dollar. It is always handy to have an analysis of the bigger picture, which allows me to trade comfortably amid all the noise.

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Schwab's Sonders Is Cautiously Optimistic

Charles Schwab's Liz Ann Sonders was one of the first to boldy predict the end to the recession back in June, and so far she's been on track. Despite choppy economic data the trend has undoubtedly been pointing to a recovery, and the stock market has rallied substantially ever since the March lows. She is out with her latest strategy piece (with video and accompanying slideshow presentation), and she is still confident about a bull market, though more cautious given that we've come a long way with this rally. She's looking at a "square root-shaped" recovery which is a flattening out after a "V"-shaped recovery, instead of a double-dip "W". Her reasons on staying bullish are: 1) a confirmed "V"-shaped recovery based on leading indicators; 2) job growth is on the way early in 2010 based on record corporate profit recovery in a recession; 3) valuations are at worst neutral; and 4) sentiment has not yet reached extreme bullishness (contrarian indicator). I have the link to the video below (click on image), which includes an interview with Political Strategist Greg Valliere. That interview is interesting as they talk about the risk of higher taxes and geopolitical risk next year... a potential bogey for bulls looking for an extended stock market run in 2010. The link to the video expires so be sure to watch it. I've also embedded the accompanying slideshow PDF file which is downloadable just in case you don't have the time to watch the whole video. Enjoy!
To learn more about trading psychology, and how to use the various technical indicators, try a free e-mail trading course here.
20091204_market_snapshot_slides_1209-11956_v1
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