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Breakfast with Brodsky



Good morning. Recently, I have been feeling a bit bipolar in regards to my market sentiment. I have been making bear and bull cases and arguing, primarily with myself, about where we might be headed. On one hand I think that the recent action is bearish for the following reasons: ALL news is being sold, breadth stinks, small caps (which lead us) have been struggling recently, and maybe mostly importantly, everyone I speak to is bullish. Let me touch on that for a second before I list my bull cases.

Back in 2003 when the market pulled in, very few people sat there and bought dips. The shorts tried to press and everyone thought the market had topped at each pullback. Of course, with hindsight, we see that the thing to do was to buy everything and ride the wave. This current pullback is being met with exactly the opposite sentiment. EVERYONE is talking about buying the dip! And they are not just talking; people have been buying and trying to time a breakout.

Take a look at the SOX (Phil Semi) because this epitomizes my point. This index has been grinding lower since its peak on January 20th. It looks like a pretty orderly descent from its highs, and the correction appears to be normal. My problem with this action is that people, including myself, have been buying the semis at what we think are the right levels, but there is no juice to get them going. No shorts to panic, no news to act as a catalyst! So what, if anything, will get this index to trade higher? One thing needed is for everyone to start hating the space instead of buying the "500 level." This index will have a reversal at some point. When it will happen and how long it will last no one knows, but my point is that we need more panic and fear in this sector to drive it higher! Heck, we need more of that sentiment in the marketplace to drive IT higher!

My bull cases are much more simplified. Fundamentally, things are not terrible, technology cycles are still not at their peaks, it's an election year, and for the last five days the market has yet to break down. The last point is the single reason why I am not totally rushing out and shorting a ton more. There has been a lot of bad news, tech has been getting smoked, cyclicals have been hammered, and the transports look like death! However, the broad market has yet to break down. The S&P is not collapsing (yet), the Dow has been in the tightest trading range since Jan 29, and the NDX has already retraced to its 50-day MA (1466) which is also a 50% retrace! Why have we been holding? I honestly have no idea! The reason WHY we are holding is meaningless next to the fact that we HAVE been holding.

Lastly, I do think that everyone is all bulled out on the market. That makes me very very nervous. A wise man once told me that the only way to make REAL money in the marketplace is to fade what everyone is doing. It means that if the boat is loaded too heavily on one side, you should probably think twice about getting on board. Good Luck.

Of course, I share my process with hopes that it adds value to yours and I offer it with educational intent (and not advice)

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No positions in stocks mentioned.

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