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S&P Watch: Time to Exit


The countertrend rally may have run its course.

Readers will note that, since mid-June, I've become increasingly cautious on the market. Since then, I've outlined a trading strategy that can be summarized as follows. (I've written a few buzzes outlining this strategy: June 16, 18, 22, 25, and in A Sign of Market Exhaustion.)

Second-quarter earnings season will be very constructive with positive surprises outnumbering negative surprises.

2. If the market goes into earnings season above the 920-930 S&P 500 level, upside beyond 1,000 is likely.

3. However, if the market goes into earnings season below the 920-930 level, the market's likely to simply make an assault at the highs at around the 950 level and exhaust itself there.

If the market violates the 920 area, a test of the 870 to 880 area is likely. However, I'll be looking to buy aggressively at the 870-880 level for a retest of 950.

Readers will note that I've become more and more cautious as the market has violated the 920 region. I levered up my portfolio in the low 870s, but that was only for a trade for a retest of the highs at around 950.

The market has come into earnings season well below 920. Thus, according to my strategy, upside is likely to be capped at around the 950 level. With the S&P currently at 925, this limited amount of upside doesn't justify a core position given that 870 is also a near-term possibility on bad news.

So, readers should assume that I'm liquidating all long positions today with the S&P at around 925.

In actuality, I'll retain some core longs (particularly in the tech area) but I'll be applying shorts in selected European, Asian, and emerging-market stocks and be about 50%-50% long-short. It'll take me a while to do this, so I may not be able to post much regarding my short positions for a few days. However, if I had a long only portfolio, or a US-only portfolio, I'd have gone to 100% cash.

Readers should consider that, from my perspective, the broad-based countertrend rally in US equities is over. Short-term upside from current levels is possible, but if I play for such upside at all, I'll play it only as a day-trader -- not with a core investment position.

The outlook from here on out is much more complicated, and investment strategies will need to be more nuanced.

Finally, I'll write in the next few days to make an assessment of my investment strategies and the returns on my holdings.
No positions in stocks mentioned.
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