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Market Tug of War


Weak economic data, strong valuations fight for control.

Yesterday Toddo wrote an excellent article calling for a massive near-term move in the markets. So far this year Round 1 has to go to the bear but in Round 2 the bull is staggering to his feet and attempting a head-to-head stare down. Who will blink first? The technical pressures have been building for weeks and the relief valve will have to be opened.

We have two conflicting forces in the current tug of war. The US economic data continues to deteriorate but for the most part valuations are reasonable. Regardless of who wins this round, the knock-down drag-out fight should persist for months to come. We all know it is profitable to be a long-term bull so there's no value added in being a one-way talking head. On the whole, this decade hasn't offered much for index investors, so navigating the short-term picture and controlling risk is always the job at hand and what we as professionals should be striving for.

Until there is a meaningful change in the economic backdrop or a significant improvement in the credit markets we should be range-bound through the second quarter. The upside potential on a breakout could take us to 1408 on the SPX with downward moves contained by January lows around 1280. Over the next few months sentiment will rotate from the glass half empty to half full and back again.

I've talked about bear market trading rules in previous articles. Here is a couple more to throw at you.

Company risk right now is very high. There isn't a lot you can do with market risk but you can control company risk by keeping positions smaller.

If you've had a 10% or greater move in a stock about to report earnings, take some chips off the table just prior to the report. If you feel you really have an edge going into the number than by all means keep the full position. Just remember you don't have the economic wind at your back and neither does the company you are investing in.

No positions in stocks mentioned.
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