Weekend Market Wrap: Long and Strong

The SP500 closed higher again this week and finished at another new 5 year high. The market has continued to be aided by the steady trend of declining Jobless Claims as well as substantial Federal Reserve liquidity flows. Here is the February schedule for the Fed's open market operations. In my opinion, the in-flowing liquidity from the Fed is the primary driver of this market rally. I do also get the sense that the market may need to take a breather, typically however before I am ready to call a top (which I hate doing) I would like to see one last blow-off type move to the upside. Everyone and their mother are calling for the market to pullback here which usually means the market will do the exact opposite. But the price action the last week has shown that there is a willingness to sell at a moments notice; traders are getting antsy and we can see it here with the very sideways trading we saw this week. This sort of tug-o-war going on between the bulls and the bears means that the market is finding equilibrium in price and that buying momentum has waned. Still what would cause the most pain here would be for the market to push higher, causing the shorts to get squeezed (make them close out their bearish bets) and the under-invested bulls to jump on board right at the last minute. When there is no one left to buy is when the selling will come in.

We need to keep perspective that although we have seen a big run to start the year, markets go up AND down, so we need to think about hitting the breaks if the situation dictates.

The first thing I will be watching Monday is to see if we can hold this recent range breakout. This is the 2-week view, each bar is 15 minutes. What we have seen over the past 2 weeks is a trading range develop between  1495-1515. Friday, after a strong positive move in the morning, the market was able to consolidate above the range resistance. The First thing we will watch for as to determine if we will go higher or lower from here is whether we can hold the breakout support at 1515.  From these consolidations tend to come swift movements in the direction of the breakout. However from these breakouts, if they fail, they tend to fail to the downside even faster. If the breakout were to fail, I would be looking at the prior range support to hold at 1495. If that level goes then we are likely in for a deeper pullback (which from a slightly longer term perspective would even be a good thing).

 Looking at the Daily chart we see the most recent range (1495-1515) and the earlier consolidation (1455-1475).

  Both consolidations were nearly identical in length (10 days and 9 days), both were 20 point ranges, and both had 5 down days. We will be looking for a breakout follow through move above Fridays highs.
The trade target for the range breakout is 20 points above the breakout, 1535.


Lastly, lets look at the past year and see how it compares to the rally from last January through March.
1-year Daily Chart

Even with all the talk about how the market is extended and due for a pullback, you can see that compared to last year we still could move quite a bit higher before stopping out. Not that I necessarily think we will continue straight up, but the fact that we have been in a similar situation shows how far the market can continue beyond what would seem logical and reasonable.

Similar to last year, Europe is beginning to show its ugly face again with debt concerns and general uneasiness. If you recall last year Europe threw quite a little monkey wrench into the rally for a period of time.

As of the close Friday I am holding just under my maximum long exposure. I am 75% invested as of now and was 80% going into Friday, but did make one sale into the strength we saw at the end of the week. 80% invested is the maximum stock exposure I will take on, while holding 20% cash to make shorter term trades if opportunities arise. I like having that cash cushion just in case a unique opportunity presents itself.

As long as we stay above the range breakout of 1515 I will continue to be fully invested and look to reduce my weaker positions into strength as we continue toward the 1535 target. If we slip below and back into the trading range I will likely be stopped out of some positions that have been very successful but are showing signs of rolling over. Of the stocks I own at the moment about half look very strong and half look vulnerable. So I will continue to monitor those positions and the overall health of the general market as this week plays out. We will be moving out of typically the strongest time of year in terms of historical market games (Dec-Feb) soon and entering into the poorer time of year (April-September). So I think its wise to appreciate what we have gained during this strong time and start transitioning into a more risk adverse posture.