Don't Fight It

The market is oversold, momentum has shifted in the bulls favor, sentiment is negative and we are approaching the turn of the month. Could the market retest yesterday's breakout? Could new problems emerge in Europe over the weekend? Sure, but the odds are in the bulls favor. Once the market is overbought and everybody is talking about liquidity, recovery and puppy dogs it will be the time to go short again. For now, bears should just stand aside.


Anonymous said...

We have bounced over 6.5% in 3 days. Another 2% higher an we will be at the 50% retracement level of 1127 in the e-minis. If we get to that level we will only be 7.3% off the highs. We could easily see that level today.

If we do indeed get there I am not sure how much longer I would want to wait to get short. I understand there is a time component to your oversold/overbought readings. However, if someone is predisposed to believe we have seen the highs and is looking to short, I think they need to take into account the magnitude of this bounce as opposed to waiting for an oversold reading to technically dissipate.

I would also add that no one is more bearish long term than me and I am pretty much fully hedged at the moment. My small sampling of contacts tells me that this market is not as short as it's been on previous selloffs. I think they have been burned so many times since last March that they have learned to take more profits and keep trailing stops tight.


Tsachy Mishal said...

You are correct. Time is the most important component in my opinion. Maybe the bulls will waste the time by chopping around or rallying in a weak manner. But bulls are now on offense and I think it pays to give them at least a week to see if they could put points on the board. Maybe they will only reach 1128 in that window.

PJ said...

Tsachy, I respect you more than anyone in regard to timing stocks, but listen to me re the economy.

The second leg of the depression has now begun. Today we learn that April consumer spending was flat. It will be down in May, and down by a bigger amount in June. The payroll report next Friday will show a boatload of census workers and a decrease in private sector workers. Every economic report from here on will disappoint.

This is happening globally. Japan today reported CPI of -1.5% yoy and -4% mom, consumer spending -0.7% real and -2.2% nominal yoy, much faster mom. The UK reported atrocious economic data two days ago; Germany's economy is also turning sharply down.

You wondered a few days ago when the market would realize the economy was turning down. I think the hurricane is just days away. Maybe today, maybe in a week, but not a month.

Tsachy Mishal said...

I agree 100% that the economy is slowing and that the biggest risk is the stock market recognizing this. Same store sales reported by individual retailers next Thursday might offer the first clue.

PJ said...

Lots of data next week. PMI Tuesday at 10 will be market-moving, as will non-manufacturing PMI Thursday, and payroll report of course. Chicago PMI today showed sharp decline in employment index, decrease in new orders index, rising inventories. Typical pattern for business cycle turning points.

I think JD has the right view: ES is unlikely to go higher than 1127, I'd be surprised to go over 1120.

A lot of the high-beta stocks I look at are surprisingly close to their highs. We've had a risk rotation from big caps to high-beta stocks. That may reverse next week even if the S&P drifts upward.