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S&P Watch: Prepare for Profit-Taking

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Use low-risk entry points and stops to minimize risks and protect profits.

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This "not as bad as expected" stock market has rolled upward through overbought territory. As I said, the TARP was a trap for those financials that felt obliged or forced to participate.

Recently, earnings, stress tests, employment numbers, housing and even foreign markets have produced a "not so bad" attitude, which has allowed many traders to run stock indices higher while taking bond prices lower. Some degree of profit-taking was inevitable.

As we know, Mr. Market will confuse and confound as many market participants as possible. The degree of underperformance by skeptical hedge, mutual and institutional funds since March 9 provides evidence that this 30% rally has been the least-trusted since the market rebound of 2003. Their dilemma isn't whether, but when to try to play catch-up. Hence the current market conundrum.

The debate rages on as to whether this is a bear-market rally within an ongoing secular bear market, or the beginning of a new secular bull market. As I have indicated before, I don't care. Since the truth of the matter is that no one knows, why debate the semantics?

As a fundamental investor, I do care about GDP growth, unemployment claims, the direction of the manufacturing data, inflation vis-a-vis the LIBOR, dollar, bonds, gold, oil and further Washington programs, "stimulus" packages and creative government involvement in private industry. Scary stuff.

The good news: The Depression is over. The collapse of our economic system has been thwarted, if not averted, by whatever means you wish to deem responsible. Is that reason enough for a +33% rise in the S&P 500? Perhaps.

Does that mean they rang a bell and sounded the all clear? Absolutely not! But what it does mean is that longer-term income-oriented investors can apply the buy disciplines I use to build and trade around long-term core holding positions as the market allows. Time and price. Style and patience.

The market stats have been recounted endlessly and from every conceivable current and historical perspective. Barron's reads more like Baseball Weekly than a financial publication when recounting the parameters of this recent rally. And like a batting average, that's looking through the rearview mirror.

I'm seeking guidance, as usual, from trendlines and support and resistance levels. These levels have provided guidance for sectors, stocks and indicies. I'm also drawing on the excellent teachings of Minyanville Professor Smita Sadana for using low-risk entry points and stops to minimize risks and protect profits.

The cash S&P 500 daily chart below illustrates the trend channel I have followed since the mid-March move, correcting the straight V-bottom move from March 9. As I said on April 20, a break above S&P 875 would expand my trading range. We got that breakout and a move this past Friday to an intra-day high of 930.



While I'm no technician, technical analysis is a tool in my toolbox - I believe it illustrates the market; it doesn't define it. As the chart illustrates, the V-bottom move off the March lows consolidated briefly before exploding upward on March 23 with the news of the Treasury Department's bank bailout and toxic-asset plan.

The daily news flow and fundamental indicators have created a channel for the S&P 500, which currently runs between 950 on the top end and 875 on the low.

Also note that resistance from the 200 MVA lurks around 952 and the January highs of 943 on the S&P 500. All this adds up to a trading range heading into a seasonally weak period, and an opportunity to trade around core positions between S&P 950 (remember, 930 was the recent high), and 875-850 to give stops a little room on the downside.

That's why I said earlier that a bit of profit-taking was to be expected, particularly with the secondaries being offered by debt-ridden companies, oil climbing above $60, and with the market going into an options expiration week where moves in both directions can be exacerbated by volatility and options pinning.

I'm trading what's in front of me in stages; selling at the highs of the range, buying at the lows, and adding to cores that help my costs basis. I continue to overweight the economic-recovery-sensitive areas and to utilize any preferreds or convertible preferreds that fit the metric and have yield protection. FCXpM, FPLpF and BGEPF are good examples of this.
No positions in stocks mentioned.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

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