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A Bear Scare Arrives on Wall Street


Will we hold or will we fold?

Editor's Note: Todd posts his vibes in real time each day on our Buzz & Banter.

Yesterday we offered that it was Do or Die for the Bearish Try; while we were pointing to the most recent downtrend (updated in the first chart below), there were other unresolved matters that left a fly in the upside try.

We ran down the checklist from earlier in the week:
  • The S&P (INDEXSP:.INX) didn't quite get to the 1475-1480 support we fingered (1485 was the low tick; the second chart below).
  • The chasm between commodities (as measured by the CRB) and stocks (the S&P) continues to suggest that the former must rally or the latter should matter to the downside (chart 3).
  • The banks tested -- but couldn't bust through -- BKX (INDEXDJX:BKX) 54, which was the downtrend of the recent series of lower highs (as go the piggies, so goes the poke; that last chart below).

Now, let's revisit an article from February 6 -- a lifetime ago, I know -- entitled, Three Things the Bears Need to See. As scribed at the time:
  1. Market darlings getting taken out back and shot -- and we can check that box as Apple (NASDAQ:AAPL) is off 37% since September.
  1. The financials -- up 18% in that same three-month span -- have bent, but have not broken. The bears need to see this complex take a hard right to the chin as they encapsulate the cumulative compression in our finance-based global economy. BKX 52 is the level to watch as support (we've already fingered BKX 54 as resistance) and below that, some beads will begin to build on the bovine brow.
  2. A blow-off phase, as opposed to the steady grind higher, which has effectively worked off overbought conditions as a function of time rather than price. I thought we might have seen this with a pop through S&P 1500 (perhaps to 1520 or higher) but it's been a tug-of-war, not a full-fledged retreat. Remember, most every market move is defined by three phases: denial, migration, and panic.
The question is: Can we make the case that we've seen a blow-off if we're at the same level as we were on February 6, when that article was written? Not sure, but the three-day (almost) 3% rally in the S&P was about as vicious a squeeze as we've seen in some time, so let's say the jury remains out (for those of us who have traded for 22 years, we know what real squeezes look like -- and that wasn't one of them, but this is a different world).

In terms of my current posture, I bought some Potash (NYSE:POT) calls Wednesday morning and later that day, I shorted the S&P (through September SPY puts) on a dollar-neutral basis (the cost of the calls equaled the cost of the puts). The Potash position has a sell-stop below $37 and similarly, I set a buy-stop on the S&P position above S&P 1525 (cash).

Yesterday, the S&P ticked at 1525 -- on the nose -- but I didn't cover my SPY short; in fact, and as discussed in real-time on the Buzz & Banter, I added to my SPY puts yesterday into the lift as my risk got tighter and more defined. I asked myself if I was throwing good money after bad and my response was, "Only if I'm stopped out." (Please note, I've covered some of that overage this morning into the downdraft, in real-time on the Buzz & Banter.)

There are no victory laps in Minyanville -- particularly while a trade is still open and most certainly given there is so much trading left in the day -- so take this for what it's worth, which is real-time financial education shared through a vicarious learning process.

Random Thoughts:
  • Deutsche Bank (NYSE:DB), our favorite overseas financial proxy, is currently trading 5% lower.
  • BlackBerry (NASDAQ:BBRY) remains on my shopping list around $12 (the 50% Fibonacci retracement). It got to $12.60ish a few days ago but I didn't pay up (it acts great again today).
  • Again, commodity volatility typically precedes equity movement.
  • The trend of higher volume on down days vs. up days, which is a stealth sign of distribution, continues to continue.
  • My presentation for The Social Mood Conference (the early bird special expires today!) is almost complete. If you wanna join me -- and a lotta folks much smarter than me -- in Atlanta on April 13, lock your spot and we'll see you there!
  • What's my price target on Potash? $41.40 is where the 50- and 200-day moving averages converge so that's an intuitive spot to pare some risk, if and when (and yes, I understand this stock traded at $80 in 2008, but it's not 2008 anymore!).
  • I mean, as long as we're using a time machine, let's go back to 1999 -- Minyanville would be worth a bazillion dollars!
  • How do you know if your risk is right-sized? If you're able to have loose grips on the handlebars and most importantly, if you're in a position to use prices to your advantage. In other words, if you're short (with defined risk), you should embrace higher prices and ditto the other way; if you're long (or want to get long), you should welcome lower prices.
  • You wanna hear something nucking futz? The Nasdaq-100 (INDEXNASDAQ:NDX) has traded in less than a 100-handle range this entire calendar year!
  • I'm done trafficking in cheapie stocks as a proxy for my single best investment theme for the next decade. The winners in the space will likely live in the Potash / Altria (NYSE:MO) / Monsanto (NYSE:MON) arena, but there is massive tracking risk with them (considering this isn't a part of their product mix yet!).
  • This has been some year on the health front-between the heart stuff last year, the ankle, the hip, the herniated disks -- seriously folks, when I said, "They'll have to pry the musket from my cold dead fingers," I was being metaphorical!
  • Bennet Sedacca's excellent (four-part) bond tutorial can be found here; John Succo's terrific (six-part) derivative tutorial can be found here!
Disclosure: Minyanville has a business relationship with BlackBerry.


Twitter: @todd_harrison

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Position in SPY and POT.
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