If you have not been bullish over the past several weeks, you’re likely not a technical trader. The market will always throw reasons to be cautious at us, but we’ve had many strong buying signals thrown at us. Sometimes there are good reasons to be cautious. Other times to use the term is quite cowardly. I hear so many pundits telling people “we’re being cautious here.” Ultimately, you have to pick a side. How much of your capital is invested and in what direction? If the pundits are cautious now, does it mean that at other times they’re comfortable? When do those times occur? When are traders ever comfortable and not worried? No matter what is going on with the economy, there is always the fear of an exogenous event. That never goes away. Especially after 9-11.
Here are my seven reasons:
1. Price. Price continues to move higher. Still the best indicator of all.
2. Internals. I usually use TRIN as my measuring stick. I’ve seen several days where the indicator has been below .5.
3. Key Breakouts from Momos. AAPL blew out of a multi-month consolidation to make a new all time high. It is a big deal when a highly followed high volume stock such as AAPL prints a new high and holds it. Another key breakout was Visa. In bull markets, leading stocks are repeat offenders on the 52 week high list.
4. Key Breakouts from the Abyss. Stocks such as Citigroup which were once untouchable by CNBC folk have been moving strongly. Moreover, the fundamentalists are even getting on board with C. There is talk of a “turn around story.” Vikram Pandit has been getting good press. Likewise, many of the junk regional banks I have discussed are taking off.
5. Euro. I mentioned that I thought EUR/USD would find a bottom and that call is looking good. This is important because it will be difficult for the market to move higher if USD is going up. Even better, after a big EUR/USD drop, if the Euro were to strengthen, the market mind have the wind at its back again with respect to USD.
6. China. If you follow this blog, you know that China is the centerpiece of my portfolio these days. I don’t have a fundamental opinion on China. It is just that I don’t believe the market can move higher without the China story in shape. The China ETFs (FXI and PGJ) were falling apart for several months. This is the primary reason I was generally out of the market towards the end of 2009 and early 2010. From a technical point of view, FXI and PGJ still need to do some work to prove this leg higher is not a bearish throwback (especially FXI). But with everything else looking rosy, I like the chances of China getting back on track.
7. Low Volatility. Low volatility in the long run can evidence complacency and can be a bearish indicator. But as I wrote last week, I believe that until a trend change occurs lower volatility fuels demand for stocks. Low volatility also means that other than an unpredictable exogenous event (e.g, terrorist attack, major earthquake in Los Angeles), an instant market crash is off the table. I’ve studied market crashes some, and in almost all cases I saw high volatility and price trading below long term moving averages before the crash. You can never account for the exogenous event, but at least I know I’ll have time to hit the exits before a major down day. That is safety that I don’t have when the VIX is at 30 and price is struggling to hold or below its 200 DMA. I’m not the only guy to figure this out. Low volatility causes portfolio managers to need more bang (more stock) and it also makes portfolio managers more comfortable (I would argue that complacency is a good thing until it gets too extended – it is good until it is bad).
So what to do now? I’m currently only 27% invested but I’m long and I’ve been mostly in the right stuff. So while I don’t have a huge profits, I have built a small war chest up permitting me to trade with 2010 profits rather than dipping into capital. That’s always where I want to be. It is a lot less stressful.
I have to admit it. I can feel the temptations of chasing the market here. Other than AXTI, everything I’ve bought has been working. I’m now wishing I was 80-90% invested rather than only 27%. But I’ve also been around enough to know that profits can evaporate quite quickly.
My SPY chart shows heavy resistance at $117. RSI is at 75. Resistance and overheated momentum usually equal resistance holding or a false breakout and a move higher after a second attempt (a retest). So for someone like me that has been participating in the rally but is underinvested, it makes sense to add very small positions or to stand down until enough momentum burns off to sustain a move higher.
The reality is the bigger plan is to hopefully catch a wave (a trend) that runs for a few months. That is where the real money will be made. If this multi-month wave were to occur, I’ve still got plenty of time to aggregate my positions up. Meanwhile, if this rally turns out to be short lived, I’ll be quite glad that I only made it up to 27%.
I added a little BAC yesterday. I think BAC could be the next GE and I’m looking to add to that position. I’m also looking to add to my EWC position. I want to own EWA as well but I’m waiting for it to take out the January high.
Now if I can only get some comments and emails telling me how wrong I am? I don’t want bullish euphoria getting too hot (as mentioned on Sunday, I continue to watch LIBOR tick up. Hmm.)