Two Positives From Monday

CNBC today spoke about institutions taking defensive measures
to lock in profits. Their take was that many institutions have had good years
and the managers don’t want to see their bonuses shrink. Bombings in Turkey,
more Al-Qaeda threats, and a nosedive in foreign markets, (especially Japan)
also helped to encourage selling and “defensive measures” today.

Amid all this bad news, two positives are shining through. First,
as I write this, it looks as though volume is coming in very close to Friday’s
levels. Even if this does end up qualifying as a distribution day, it certainly
doesn’t appear to be overwhelming distribution. Secondly, the VIX was
up over 14% at its peak today, and closed nearly 10% above its 10-day moving
average. What does this tell me? First, some CVR buy signals will probably trigger
in the next few days. Second, Haggerty, Carter, Navarro, Landry, Kaltbaum, and
I were not the only ones to notice all the negatives. “Defensive measures”
were being taken. (Did CNBC actually get something right?)

When the market makes a big move, it does so with the least
number of people on board as possible. It may go down from here, but not straight
down. Some of the people who took “defensive measures” today and
yesterday are going to need to be shaken out of their shorts before the move
down will truly pick up steam (if it ever does). I believe caution is warranted
on both sides of the market right now. Some kind of intermediate-term top may
be in place, but I wouldn’t bet the farm on it just yet.

Keep in mind, just because the long side is not working as well
does not mean that short side is going to start printing money. During a bear
market an abundance of opportunities will present themselves to make money on
the short side of the market. Many of these opportunities will have strong follow
through similar to the upside follow through that many breakouts have experienced
over the last 7 months. During a “normal” 10% or so correction,
breakdowns will be more hit and miss, and even most of the successful breakdowns
will trade much more choppy. What this means is that although it will be very
difficult to make money on the long side during a 10% correction, it may be
nearly as difficult to make money on the short side.

If you got short Thursday or Friday, congratulations. You might
want to lock in some profits soon. If you aren’t short now, I wouldn’t
spend all night looking for candidates. Let the market bounce a little before
attempting entries.

If this “top” were to truly turn into a sustained
downmove, then there will be plenty of opportunity to profit from it. In my
opinion, creeping commitment along with systematic locking in of profits would
be the way to play the short side until breadth and follow-through are evident.
If this correction turns out to be mild, then a simple culling of your weaker
long positions may be all that’s needed to prepare you portfolio to take
advantage of the next move up.

Watch the market closely, and be ready to react when your triggers
are hit. Just don’t overreact, or you’ll run the risk of getting
chopped up.

Best of luck with your trading,

Rob Hanna

robhanna@rcn.com