Identify edges and trade to win!
Good morning and welcome back to the saddle. After yesterday's snappy showing, the bears left bruised and the bulls were glowing. "Is the coast all clear?" Hoofy asked with cheer, "or is it not as safe as it appears?" Last night, at a quaint and quiet bistro, the fab five met for a nice bottle of Chianti and some flavorful schnitzel. The conversation went a little like this:
Boo: As anybody seen any kitties around? I'm hearing that there were some dead cats bouncing yesterday!
Daisy: That's a nasty analogy, Boo, can't you say "oversold bounce?"
Boo: I'm not concerned with semantics, milkshake. The Minx got smoked last week to the tune of 40 S&P handles and 80 NDX points--the first such drubbing in a while. During the requisite morning probe (that touched the NDX 50-day moving average), some fresh pressers got sucked into the mix. The combination of (short-term) oversold readings and newbie bears fueled the reactive tape higher.
Hoofy: Alright, I'll agree with you that a snapshot of the last week or so offers a series of lower highs and lower lows. Before you start getting emotional, however, pull the time frame on your charts out a bit...say, six months. That's a stairway to heaven, baby, and a rather defined uptrend.
Snapper: I LOVE Zeppelin!
Sammy: He brings up a good point, Boo, in that the juxtaposition of time horizon and risk profile is extremely important in managing any portfolio. But we already know that--I'd be more interested to hear your take on our current juncture and immediate future.
Boo: I'll start-- Alright, my most glaring error this year is that I didn't allow for the cyclical bull phase within the secular bear market. I own that--or, as the case may be, didn't own that--but what's done is done. I understand that the liquidity agenda is still very much in play and, as such, the reflation of a mini-bubble is a possibility (particularly in front of an election). With that said, the market is lopsided in a number of ways (bell curves, sentiment) and it's only a matter of time before the underlying issues pimple to the surface. Look at the dollar index--it's now broken the summer lows! While everyone is conditioned to believe that it's bullish, it's not--it's inflationary. You know what happens when you mix inflation with sluggish growth and rising unemployment? Stagflation, cookiepuss, stagflation.
Hoofy: Alright homie, take a seat. You've been spewing the same rap for a couple of months and the market keeps shrugging it off. That is a sign of health, as is the stair-step nature of the rally, so talk to me about what is rather than what you think will be. The S&P is now "doing work" at a congestion zone and the NDX held right where it had to. A little fear is a good thing--it builds the short base which, of course, adds a new layer of demand at a later date. Hey Boo-- if it ain't broke...you will be!
Toddo: Can I interject here for a second? I know this is a metaphorical discussion but I want to add my 1 cent (I hate paying commission). It's quarter-end today and, as we know, there's a whole heckuva lotta performance anxiety out there. That adds an additional element of risk to today's picture. Ultimately, I still think we're gonna make a new cycle low but first things first. The 'easier' move, in my most humble opinion, will be a trade down to S&P 950-960. I don't know if it's today's business, but my sense is that it's sooner rather than later.
Sammy: Duly noted--now, back to reality (oops, there goes gravity)--Europe is lower again, gold is higher, the dollar (as discussed) has broken down and we had a high profile preannouncement (Sun Microsystems (SUNW:NASD). If the bulls can stage a rage, it'll be most impressive but the uber-early morning coffee will likely have a few tears in it.
Daisy poured herself a little vino and the critters soaked in the moment. It wasn't easy, they knew, but they had each other and weren't going to take any time for granted. The conversation shifted away from the tape and the mood lightened considerably. As the lights dimmed and critters grinned, all was well in their circle of trust.
Good luck today.
Todd Harrison is the founder and Chief Executive Officer of Minyanville. Prior to his current role, Mr. Harrison was President and head trader at a $400 million dollar New York-based hedge fund. Todd welcomes your comments and/or feedback at firstname.lastname@example.org.
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