No Extremes Yet

I had a reader who was a little confused by my Friday post regarding the market.  I’m am bearish in the short-term but optimistic the market will get into a new bull market over the next few months.

In my post on Friday, I wrote, “Many oscillators are at their high point rolling over so some downside wouldn’t surprise me.”  I still think we have more downside to go.  The reason I’m not a raging bear right now is because I’m not seeing the type of overconfidence (contrarian indicator) I saw in early May right before we fell quite a bit.  So, I’m using this time to get my beta (correlation to the market) as close to 0 as possible.  1 would be correlation equal to the market.  Early last week, I sold my XLF position after the big run in financials we had seen and bought the SKF to hedge my remaining short positions.  I have also used the last few days to trim some long positions.  So, all in all, I was up slightly today.

I was looking today to see why would the market turn right now as opposed to waiting until investors we’re very excited and we were higher on the indices.  One reason is that I’ve often said that after a big move in either direction, sometimes you get a counter trend move that gives back half of that recent move.  The S&P 500 peaked around 1426 and fell all the way to 1214.  It’s rallied to 1300.  So, we fell about 200 points on the S&P 500 and have rallied almost 100 points.  We also have a lot of technicians watching the 50-day moving average and seeing the markets struggle at that place.

Markets are easier to trade when they are at an extreme.  I don’t think that we’re there yet.  But, the pendulum I refer to sometimes doesn’t have to go to the extremes to reverse direction.  That’s what makes this game so hard.

I mentioned Friday the rally so far has been weak.  Today’s sell off was fairly strong even though it didn’t have a whole bunch of volume.  So, that’s not a good sign for those still holding a lot of stocks.  There was some strength in materials stocks which have been hammered.  Agribusiness stocks may have bottomed, at least for a trade.  Gold was also up.

As I mentioned last week, I’m watching each position separately right now.  If they roll over or look as if the momentum is slowing, they are sold.  In addition, if something has been beaten up badly and looks good for a trade, I may buy it.  But, my preference is to stay in a heavy neutral portfolio position until the fog clears.

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