My Outlook for the Current Market
Good Morning.
Overall the market is in a very interesting period. The rally is being led by the right stocks. Back in November I mentioned that any real rally had to be led by the financials, semi’s and the basic materials (and this will be part of today’s Trading Lesson of the Day). All new bull markets for the past 30 years have seen this leadership. And this month, the rally especially in the financials is impressive as they led again yesterday.
On the other side of the coin is the fact that there is still a long way to go to get above the 200-day. Remember that this is the same 200-day that made the Model Portfolio profitable both last year and again this year, and it also helped us avoid the 30%-50% drawdowns nearly all equity funds got hit with and most still have.
On top of this is the fact that 45 out of 50 of the Nobel laureates recently surveyed, have trashed the Obama/Geithner plan. Paul Krugman has gone so far to say he’s so sure the Geithner plan will fail that it fills him with a “sense of despair”. Those are serious words spoken by someone who has been in the forefront of understanding and predicting the economic slide over the past two years.
Where does this put us? In a purely trading sense, you follow the signals. This is what has gotten us this far and there is no reason to change. But, in a risk management sense, you may want to consider using a lower risk approach to shorting the market when the signals occur. This can be done with in-the-money puts (not my favorite) or done with credit spreads. The credit spreads limit the risk in case the Obama/Geithner team is correct and we transition higher into the bull market. This also allows you to profit if Paul Krugman and his fellow Nobel laureates are correct (hopefully they are not) and the market decides to start its next leg down.
Think about this strongly here. We’re living through economic history. Money can be made and the best way to do it here is to do it safely. Let things work their way through and in a few weeks we’ll all know better who was correct: Obama/Geithner or the Nobel laureates (let me know who you think will be the winner).
On the trading side, it looks like many people could not borrow IFN yesterday on the close so we’ll remove it from the Model Portfolio. If you happened to be able to borrow it you’ll want to short a second unit if it closes higher today.
If DIA (the DOW ETF) closes higher today, short the first unit. If you’re using the protection/insurance taught in the High Probability ETF Trading Seminar, you’ll want to apply it here. Otherwise consider putting on this position with a credit spread in order to limit the risk in case the market really is going to race to the 200. This position will be a first of a 3 unit scale-in.
This is from Larry Connors Daily Battle Plan which he publishes each morning. If you’d like to take a free trial click here, or call 1-888-484-8220 ext 1 to start your free trial today.
Larry Connors is CEO and Founder of TradingMarkets.com and Connors Research.