Sunday, January 26, 2014

Stock Market Kerfuffle, Correction or Catastrophe?


"If it keep on rainin' the levee gonna break."


I don't know how bad this sell off will be. My gut is that it is number one or two above for now. But it doesn't matter in terms of how I feel about the duration of this stock market storm. My strategy is pretty much the same until things change. Its either red light or green light. For now it is red light. That means being in cash and day trading around this sell off.  I sold my remaining positions early during the day and covered my SPY short at the close.  I recommend to either sit on one's hands and wait for this to blow over, or for nimble traders: 

1 -Fade any long trades into strength. I would not be surprised by anything, including a big bounce tomorrow - intraday or possibly a positive day. The futures are flat right now, but who knows how they will be at the open tomorrow?

2 - Only  go long on very special situations and even then day trade them and only buy on dips after the regroup and start to head back up on the tic chart. Do not chase upside momentum or they will rip your heart out.

3 -  Short any market rallies when they start to roll over. My preferred vehicle is the $SPY or any major ETF.  Put options are OK for these vehicles since they trade in size with small spreads.

4 - Preserve capital. Scalp and don't get greedy. Fade the extremes. Sell the rips, buy the dips, and all the other trading platitudes are most important now.

Here are the facts as I see them:

Monetary Policy:

The shorts always have the best intellectual argument and right now they are in control. We are in uncharted territory as the Fed tries to wean us off its unprecedented QE policy. Short term we just don't know the implications of a late stage QE with tapering now in place. I have been posing the question of whether the economy is slowing and is the Fed taking away the punch bowl just as it is becoming clear that they are pushing on a string?  With a new Fed coming in, the economy an unknown. and with all kinds of international currency turmoil going on, the short term monetary situation is unclear. In addition, China may be having the hard landing that many have feared. On the opposite side of the coin, long term, the economy is still flush with QE money and the Fed is not going to stop the easy money conditions until things become clear. Thus despite the monthly temperature taking regarding tapering, in my view, this is going to be a drawn out affair. This is not Rock 'em sock 'em Paul Volker land. So call the Fed short term uncertain and risky.


Investors are still too bullish, but at least some measures of sentiment are finally starting to show some fear. So still bearish, but at least starting to break the fever. To wit the $VIX finally moving up, with plenty more to go until we can say that the $VIX is high enough to show real fear. My gut is  that put call ratios, AD lines, McClellan Oscillators, etc. are in similar places. I inserted "resistance levels" where the $VIX has reversed in the past couple of years:

The Tape:

Short term break downs are all over the place. Long term is another story. The indexes and many stocks have broken some short term support zones, but there is a long way to go from some short term break downs to putting in a long term top. Here are some S&P 500 charts with different time frames. As one can see, one's opinion of the market all depends upon what perspective one is using to view the market:.

$SPX Short Term looks bad and cleanly broke short term support,

$SPX One Year looks like it is a bit short term toppy

$SPX Three Year looks like nothing but an extended healthy market that could pull back to some major up trend lines.

$SPY Five Year looks like a market that is way extended and could do lots of damage while still holding it's five year uptrend line.

So the tape stinks right now. Short term red light, long term lots of room to pull back before we call this Armageddon.

Make Your List Of Potential Buys & Don't Be A Hero

Whatever one's strategy is, now is the time to make a list of one's favorite stocks to buy when things turn back up. I am not a bottom fisher. Nor am I into Fibonacci retracements and all that. I think Fibonacci is total media nonsense. Leo "Fibonacci" never saw or traded a stock and nothing is preordained. Just see what the late Peter O'toole said:


If one must bottom fish, I recommend using the lower Bollinger Band as a guide to where a strong relative strength stocks should pull back to in a healthy market. And whether this is a healthy market is up for debate.

My methodology is to wait for a good market and chase stocks or opportunistically buy great growth or story stocks that are bottoming. So I would see how my favorite stocks like CSIQ, GOOG, MONIF, PCLN and many others hold up. Some may fall by the wayside and some will hold up and possibly run early. Also, some new leaders may appear.What I don't want to do is try to be a hero and brag that I called the bottom. There will be plenty of time to get back in the game when things turn around.

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.
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