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Jeff Saut: What to Do Now


On a trading basis, the equity markets may be overbought, but traders want to be long heading into options expiration.

This article was originally posted on the Buzz & Banter where subscribers can follow over 30 professional traders as they share their ideas in real time. Want access to the Buzz plus unlimited market commentary? Click here to learn more about MVPRO+.

"Remain in a defensive stance for now. The market's bounce is encouraging, no doubt, and we're not finding it difficult to uncover enticing stocks for our Watch List." . . . The Cabot Letter Hotline (8-13-14)

I read the aforementioned "hotline" from the acute folks at the Cabot Letter yesterday morning as I saw the preopening futures print up about 4 points at 6:00 a.m., and I agreed with their prose. That became especially true when the jobless claims report showed a larger-than-expected increase of up 311,000 (vs. +295,000e).

As our economist Scott Brown, Ph.D., wrote, "The pop in claims is likely related to seasonal adjustment issues and should not be market-moving (it will take more than one week to determine a change in trend). Import price pressures remain benign." He went on to note, "Higher than expected last week, but the trend remains low. The previous week was revised to 290,000 (from 289,000). The Labor Department indicated that there were no special factors. One week does not make a trend, but the unadjusted figure showed less year-over-year improvement than was seen over the last several weeks. The number of people receiving benefits (regular and extended) was 2.54 million in the July 26 week vs. 4.58 million a year ago. Note that extended unemployment insurance benefits expired for 1,350,663 individuals at the end of 2013."

And on that report, the preopening SPX futures went from up 4 points to marginally negative. Yet later, those same numbers caused the S&P 500 (SPX/1955.18) to rally right up to the top of its 1940 - 1950 overhead resistance zone and stay there for most of the session. Such a stall should have come as no surprise given my comments of the past six weeks, as well as the fact that 1950 represented a convergence of the SPX's 20-day, 30-day and 50-day moving averages. However, by yesterday's close the SPX had punched through the 1950 level on news that Iraq's Prime Minister (Maliki) was stepping down. Indeed, on the closing bell the SPX had broken out to the upside, eliciting many questions as to whether we should recommit the cash raised in early July at SPX 1985. My response was, "Well, maybe."

Here's the "rub." While yesterday's action is clearly an upside breakout according to my work, it has come more as an option expiration "squeeze" into today's "witch twitch" making the reading of the "tea leaves" difficult. Additionally, I have found over the years that buying into the equity markets with the McClellan Oscillator this overbought (see chart) has not been a particularly good strategy on a trading basis. Knowing, however, that markets can stay overbought longer than you can stay solvent, like the folks at the Cabot Organization, I too can find stocks to buy. Two of which, also favored by our fundamental analysts, are Iridium (IRDM/$8.63) and Weyerhaeuser (WY/$33.06), both rated Strong Buy; and I own them. And this morning traders want to be "long" into this afternoon's expiration despite the geopolitical issues. We'll see if that remains the case next week.
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No positions in stocks mentioned.
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