Remaining Constructive

In the very short run it is not very surprising that the market is pausing after a 90 point run in the S&P 500. I believe the most likely outcome is that the market maintains an upward bias through the end of this week. Sentiment indicators have plenty of room before they are an issue for the market and we will not be overbought until the end of the week.

The biggest risk I see to my upward bias is more problems out of Europe. Italy has watered down its austerity plans and the bond market is not taking it kindly. Our markets have managed to decouple somewhat from European markets recently and have been outperforming. That can only go on for so long as further European woes will eventually weigh.

While I remain constructive and net long I have used this rally to take some precautions by putting on partial hedges last week and writing some covered calls yesterday. Additionally, my longs are businesses that I believe will hold up well in a slower economy. My style is to buy into weakness and sell into strength.

3 comments:

Onlooker from Troy said...

Wow, ugly consumer confidence number.  Yikes.  Nasty initial reaction from the market but if the market can stabilize and go up from here that will tell us something, for sure.  It seems likely to  me, though I did trim into yesterday's strength too.

Tsachy Mishal said...

Consumer confidence has actually been a contrary indicator historically. It is highly correlated to the stock market. When the market goes down, confidence goes down.

Onlooker from Troy said...

Oh yeah, I get that.  As you're no doubt aware, that's how SentimenTrader.com treats it.  It's just remarkable how bad it's getting, regardless of it's affect (or lack thereof) on the market.

And then again it's not really surprising either, to me.  Before this is all over the sentiment is going to be horrid, and Joe Retail won't want to touch the market with a  fifty foot pole.