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Random Thoughts: Red Rain on a Freaky Friday


Bulls and bears battle at an important technical toggle.

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

It's Freaky Friday and the skies are crying on the East Coast as red rain pelts global markets. Europe is lower, Asia was lower, and the early morning futures are pointing...lower. It's very early but Rufus must be confused; he's not used to seeing bowling averages down and mini-golf scores higher!

Yesterday, as the market opened marginally lower, we discussed how after an outsized move, such as what we saw on Wednesday, the tape tends to probe the prevalent direction at least once. We got that in spades as the S&P (INDEXSP:.INX) was 10+ handles higher-knock, knock, knocking on heaven's door at S&P 1600-before drifting lower to end the session off its highs.

This morning, we have some meaty earnings reports in JPMorgan (NYSE:JPM) and Wells Fargo (NYSE:WFC). Both topped estimates but are trading off in the early going. I've traded this sector for twenty DASH three years and can tell you that financial earnings, more than any other sector, are rear-view rather than forward-looking and the reaction to news will be more important than the news itself.

We spoke yesterday about how the field position in the S&P was extended, up 19% since September and in the midst of a 70-session "buying stampede." The financials are up 23% since the November lows, albeit not in a straight line, so some back-and-fill shouldn't shock anyone. And yes, only time will tell if there's more to it than that (remember, there are Three Phases of Leave).

I enter today's fray with a full SPY September put position, which I've been "trading around" under +/-S&P 1600. It's a bit of a moving stop-trigger given the "slope of hope" and time horizon surrounding it. In other words, in here, on this first real probe, I'm more inclined to maintain my bias, whereas if we meander around these levels, working off the overbought condition as a function of time rather than price, I'll tighten up the reins. Remember, there are "counts" that work to about S&P 1610 or so.

Finally, I would be remiss if I didn't note the price action in gold, as it is down $30 and below our all-important $1550 level. We've spoken at length about how commodity volatility typically precedes equity movement, and I've updated that chart below. It's a piece of the puzzle, and one that warrants respect as we together find our way.

On a personal note, I must excuse myself for a few hours today to pay respects to a family friend who lost his father. While I am unable to make the trip to Atlanta for The Social Mood Conference (I'll know the next steps for my hip on pun intended), I must make this trip today, as right is right and the market will be here when I return. We will, so you know, shoot a segment on the social mood presentation, which will be available for all Minyanville readers as well.

Random Thoughts
  • We spend most every session in real-time on the Buzz & Banter (click here for a free two-week trial). I know times are tough (all-time highs notwithstanding) and there's a lot of free information on the Web, but if you follow the markets, its hands-down our best content.
  • Yesterday we say "S's over N's" (S&P out-performance of Nasdaq-100 (INDEXNASDAQ:NDX)) as Google (NASDAQ:GOOG), Apple (NASDAQ:AAPL) and the Semis (INDEXNASDAQ:SOX) underperformed. I don't know if Apple gets to $360 but if it does, I'm a buyer for a trade.
  • Buying stampedes aside, the bulls will argue that central banks are driving the markets and they will continue to do so. You may not agree with it, but you should respect it as there are always two sides to every trade and a buyer for each seller (presumably at the right price).
  • One of the tricks of the trade that I try to employ is to ask myself how I would feel about (the market, a particular stock) if I was flat to the share (with no position). I understand I am prone to one (or more) of the 12 Cognitive Biases that Endanger Investors and I try to remain lucid in my approach and remove emotion from the process (easier said than done).
  • To that I would offer that nobody can argue that the price action has been pristine; what we can debate, however, is the risk-reward at these levels.
  • Having flagged S&P 1580 many moons ago, I continue to feel there are short-side trades nestled in and around these price points, and the tape is ripe for an off-sides. Given my crystal ball is in the shop, I don't profess to know when they'll arrive or how far they'll go (even the bears, or what's left of them, are conditioned to cover up on the first dip). I'm simply trying to remain consistent, humble, and opportunistic in my approach, while employing the discipline that serves us all in such good stead.
  • Sync your time horizon and your risk profile; it's a better way to live (and manage risk).
  • Remember when your toddler went through the "I don't care about daddy" phase? Yeah, it stinks for me too.
  • Good luck today and have a great weekend; you've earned it!

Twitter: @todd_harrison

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