No one knows how this years market is going to ultimately play out. All I can do is play the cards as they are dealt and use the odds at the present moment in time. So I am constantly reassessing my market view until some clarity sets in. I talked about the market's early 2014 situation in a recent post entitled "What Would Marty Zweig Do?" In that post I spoke about the 3 part model that Zweig used. Today the market had its worst day in long time. So I think that its time to revisit Zweig's three pillars of the market
1 - The Fed
In normal times I would say that monetary policy is positive and it will take some real tightening to change things. Nevertheless, these are unique times in monetary land, and over the short to intermediate term, people are scared about the end of QE. It is one thing to taper when the economy appears to be getting stronger. It is quite another thing to taper when the economy is getting weaker.
Last week's jobs report scared the daylights out of investors. Statements today about the Fed being intent on tapering regardless of whether the anemic economy is cooling down are downright scary to many investors. We all know that one report does not make a trend. We also know that the employment numbers are flat out phony because the so called discouraged worker affect is off the wall higher than normal and is not accounted for today's the employment reports. Just a few days ago the crowd was fearful of rates going up. Now the fear of rates climbing has proven to be wrong. instead we see rates falling due to perceived economic weakness.
At the very moment that the Fed told us that the economy was improving, we see some signs of weakness. So rather than weaning us off of QE, the crowd now fears that the Fed is pushing on a string and is taking the proverbial punch bowl away. In short "pulling on the string," if you will. In addition, the new open Fed policy is making us all schizophrenic. Every day another Fed head says something different. She loves me, she loves me not. Score one for uncertainty with the Fed possibly boxed into a corner.
2 - Sentiment
The sentiment numbers are pretty much the same. There are too many bulls out there and the market is still extended way above its long term moving averages. Score one for the bears.
3 - The Tape
The tape has not been good since the new year began. Other than some special situations mostly in bio tech, There does not appear to be any leadership. Just look at GOOG today. or look at SBUX and NFLX. Then look at today's negative action which may be the start of the tape finally cracking. There were many reversals today - including biotech. Score one for the bears - at least for the short term.
GOOG In Your Face! It looks minor so far, but all of the market's former leaders reversed and GOOG is a bit extended. Support levels are drawn on the chart.
S&P 500 whacked
I have let the market take me out of many trades and put me into a high cash position. That is simply a function of selling the rips and not finding many set ups to buy. Thus, in the last several days I sold stocks that I love when they whooshed up to high. Stocks like CSIQ and MONIF were sold and are coming down to earth. They are on my watch list, but in my opinion its too early to buy them and other great stocks.
One example of todays bad tape is GTI. Not that GTI is anything special, but today's market was replete with stocks that reversed down like GTI with failed breakouts. Earlier in the day I tweeted that GTI was breaking out. But I also stressed that it is the closing price that counts. After making a new all time high, GTI was dragged down with the market and closed below the breakout point. Hence I did not buy it against the weak tape. Following the rules paid off. It was the first day of the year where just about all stocks - except MRK - traded in correlation with the indexes.
GTI: In Your Face!
I am in no rush to buy stocks right now. But I am flexible and anything might happen to change my mind. So it is possible that I will buy some stocks if the market reverses back up tomorrow, preferably later in the day but I doubt it. Instead I may go to the dark side and put on some shorts.
Maybe I'll even short IBM, which finally cracked a bit today. The breakout from a double bottom failed, it was repelled by its 200 day moving average, and it broke some minor support.
Or maybe I'll short the SPY as a liquid proxy for the market. But first I have to see how the tape plays out. I am not going to chase a gap down. On the other hand, I might short a dead cat bounce that starts to roll over. In any event, there is no rush to do anything and my cash is feeling very good right now. The SPY chart broke some tiny support within a trading range confined by its upper and lower Bollinger band. But the SPY does not exactly look terrible yet. There are support levels that it will have to break and until then all I can say is that maybe it will test support. This may be the start of something, but as of now this is no bear market or even a correction yet.
One last point. This market has had no memory from day to day recently. Right now, no major market downtrend is in effect yet and for all I know this sell off will be yet another buying opportunity. I need to see more evidence. Thus I shall continue to play small and fast. That means defense for now.
BIG Capital Advisors and Seaview Partners are not responsible for your investment decisions. We believe very strongly in our opinions, but you must perform your own due diligence in making your investment decisions.