This Is Why The Tape Is As Bizarre As I’ve Seen It
As readers have
probably noticed over the last few days, I have
not had much to say regarding trading. Sure, I could have rambled on about this
and that, but, other than B.S.’ing, I was finding the trading environment
boring. Last night however, I was noticing some subtle signs of stocks breaking
down on 30 and 60-minute charts. While I have no intention of trying to play a
reversal pattern on longer-term setups (I will leave that to the Derrik Hobbs
and Dave Landrys), this does impact how I trade in the coming sessions.
Last Thursday, until Globex went down, the
indices were under pressure, and as a result demonstrated some great
HVT trades. This indicated to me there are
many a nervous long out there. When this situation occurs, it inevitably leads
to some great trading on an HVT basis. So while yesterday’s close was by no
means overly bearish, some of the underlying stocks are looking a bit “tired.”
Remember, we do not need to know future direction in order to make money, we
just need decent movement intraday, something that has been lacking lately. If a
healthy sell-off is what the doctor ordered for good price action, so be it.
However, at this point it is hard to believe that
the pullback will be anymore than that, a pullback. So while some good shorts
may be in order in the next few sessions, be on the lookout for aggressive
buying if the indices begin to consolidate.
As Michael Belkin of the
Belkin Report states in his most recent
edition:
How Far Can This
Rally Go?
Global equity
markets have surged about 17% on average since early March. While the rally can
be attributed to Iraq ‘peace’ relief — portfolio managers are now faced with
some crucial decisions.
1) Is this just another flash-in-the-pan bounce, or is there greater upside
potential?
2) Is it too late to buy, or should I jump in aggressively?
3) What do I do with all these defensive industry group holdings, shorts, cash
and bonds I have accumulated over the past three years?
4) How can I ever buy tech stocks again after that bubble has burst?
5) Since the economic data appears dreadful and equity market overvaluation
persists — can I keep my job by being a worrywart?
So our answers
to those questions posted above are:
1) This equity market bounce should be bigger than anything experienced since
the bear market started. Global
stock indexes are probably just 1/4 of the way through a
rally that has 3/4 more to go.
2) If 3/4 of the advance
remains ahead, it is early enough to join in by buying dips (not by chasing
rallies). 3) Most defensive industry groups are overowned like tech was at the
top and should suffer the same fate (at least in relative terms). Short exposure
should be painful until the extended rally peaks. Bonds and cash should
under-perform stock indexes.
4) Janus, Fidelity and everyone else spent the last three years dumping most of
the tech stocks they accumulated during the bubble and buying defensive stocks.
Order flow from the big boys will dump lowbeta stuff and chase back into tech if
the market races higher.
5) Bubble people lost their jobs when the market crashed. If stocks rise
significantly, defensive managers, shortsellers and hedge funds who get the
rally wrong could be in the same position.
That makes sense to me and explains why the tape
is as bizarre as I have ever seen it.Â
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