More Selling Ahead

A few days ago, I composed a picture that illustrated a red flag when I saw the RSI on the S&P 500 was making lower highs while the S&P 500 itself was making new highs.  That’s called a negative divergence.  It was only a red flag but it was something to watch.  Then, we got some good data out yesterday and the market sold off.  A change in character from what we’ve seen in the past.  On my radio show today (8:00 a.m. – 9:00 a.m. CST M-F on Biz Radio (, I said that the economic data that came out at 9:00 a.m. would be very important.  For the most part, the data was very good regarding the economy but the stock market didn’t embrace it.  That combined with some weak technicals was my sell sign.

For several weeks, I’ve discussing putting up with more volatility lately in stock prices and only selling if you wanted to hedge and you were quick.  The medium term picture is still intact.  Below, you can see the S&P 500 using the SPY.  It has some pretty good technical floors at $95 & $87.50.  With the SPY trading around $100, you could see a pullback of 5%-10%.

Screen shot 2009-09-01 at 4.23.55 PM

In addition to investors selling on positive news, the volume on the SPY exploded today and was the highest we’ve seen in several months.  My threshold was reached yesterday & today and therefore I’ve reduced my holdings for a trade.  I will keep tight stops on my short positions because we’ve seen this before during the rally.  The potential for a big sell off doesn’t always materialize.  Remember on the 4th of July, it appeared we were definitely rolling over and heading way down only to see a big rally that lasted for two months.  Even a couple of Mondays ago, we saw a 200 point drop which was followed by over a week of gains.  But, respect the price movement.  Negative divergences and selling on good news could mean a short-term top for stock prices.  What’s getting swept under the rug is the fact that the economic news continues to get better.  We may indeed have another recession late next year but this recovery isn’t over.

As I’ve said before, you & I have more flexibility than a lot of institutional managers that are long only or can’t move as quickly as we can.  I believe reducing your holdings and/or adding some shorts for trades can be a profitable move in the short term.  However, I will look to cover those shorts and add back the exact positions I’ve sold in the past few days very soon.


One area I’d still be buying is gold.  Gold was up today and that was on a day when the dollar was up.  They are typically inversely correlated. Gold’s been in a tight range and I think it’s on the verge of breaking out and going to all-time highs over $1,000 per ounce.  I remain long.

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1 Response to “More Selling Ahead”

  1. 1 tom September 3, 2009 at 8:45 am

    Karl, enjoyed the event you all had last night. You mentioned that you all owned AIG bonds, i saw a lot of their bonds are still trading 60/70c on the dollar. You all still think those are a good buy with the backing they are getting from the government?

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