BEING WILDLY BULLISH ISN’T KEEPING ME FROM HAVING THE FOLLOWING CONCERNS
On January 14th of this year, prior to starting my equity buying bonanza, I posted the following "Surprise: Call Buyers Returning To The Market May Not Be As Bearish As Advertised."
This was one of many studies that I pursued during January that led me to have the conviction to buy into individual equity names for the first time in months. In addition, this was one of the many studies I pursued during January that pointed to an April-May intermediate-term top for the markets.
The primary motivation behind my call for an April-May top was rooted in the way I interpret various sentiment measures. In my studies, it is not the absolute levels of sentiment indicators that determine reliable buy or sell levels. It is, in fact, the way in which the sentiment measures (put/call ratio being the primary) get to their final destination that is of importance. Meaning the velocity and time it takes the put/call ratio, as one example, to get to what is considered a contrarian based buy or sell area is the most important consideration of all.
The theory behind this is very simple. The longer it takes a group of investors to embrace one side of the market, the more sure you can be that the prevailing sentiment of that moment has fully engulfed the heart and soul of market participants. This leads to extended runs in the market that defy any logical expectation for price targets and the like. We have seen that recently as the market runup in 2012 has been nothing short of amazing. This is not because fundamentals are flying through the roof, with economic utopia knocking on the door of both emerging and developed economies. No, it is rather a function of the deeply-ingrained bearish mindset that prevailed during the second half of 2011 and the extent that the market has to go through to recalibrate the hearts and minds of investors.
I was reminded of my call for an April-May top because of the market action this week. It was the worst week for the S&P for all of 2012, thus far. We have now seen two red weeks out of three, lending some credibility to an interruption in the fields of green that have been prevalent during 2012.
On Friday the jobs report came in weaker than expected. At last check Dow futures were off some 130 points on Friday. I am sure that we will see a triple digit down open on Monday that gaps us down right through the all important generational trajectory that was expected to be a support point for the markets. It now looks as if we are officially entering that sideways period of time where the script is flipped on its head from what we experienced in the first quarter. I will have more details on this in the weekly chart review tomorrow.
My position, as reflected by the current portfolio, is abundantly bullish. I have had an outstanding year thus far and don't want to see that compromised by choppy market movement in the months ahead. There is a strong likelihood that I will be taking some action in the week ahead to reduce my exposure.
Reducing my long exposure is not simply a function of my research showing that an April-May intermediate-term top is a strong possibility. There are other factors that concern me as well:
- The trajectory point that will be broken on Monday morning will result in what is likely a second counterfeit below the generational trajectory. This is another confirmation that we are squarely in the midst of a sideways range that should last some months. The upside will be limited during this period. I will have further details on the counterfeits during the chart review tomorrow.
- The market did not react well to short-term bearish sentiment readings that should have, at least, kept the market from rolling over the way it did late in the week.
- A short-term trend indicator will move to a bearish position with a weak close on Monday. This is the second time it has moved to bearish this year. I ignored the first, as it it common for the first to be a false reading during strong bull trends. That turned out to be the case. However, the reading takes on more significance each time it rolls to the bearish side.
Long-term I believe this is a blip in the overall bullish matrix we are experiencing. The majority of the gains will occur during the late-3rd and 4th quarter.
I want to make an effort to share more short-term trades, as that is where a bulk of the activity will be for me in a sideways market. You should see a lot more of those trades posted to Twitter during the trading day and updated to the website nightly. If you don't follow me on Twitter, please be sure to follow along
That is all for the time being. I'll have more stuff as the weekend progresses.
