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The Bull-Bear Debate: Are We Topping?


Observations from the front on Turnaround Tuesday.

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

Time is the most precious commodity; this is one of the many Things I've Learned.

So, out of respect for your time and in large part because time management has never been my strong suit, I'm gonna dive right in on this second stretch of our five-session set.

The bulls will argue that they continue to work off the overbought condition as a function of time rather than price. The debt ceiling has been pushed to May (which is an eternity in our immediate-gratification world), durable goods yesterday signaled a manufacturing rebound, the Fed is a never-ending spigot of liquidity, and credit markets suggest higher prices still for stocks. Hey, they're bulls-they get paid on higher prices.

The bears, or what's left of them, are stroking their singed fur and wondering if they've lost their minds. They can trot out things like the VIX (^VIX), or point to S&P (INDEXSP:.INX) 1520 (the technical target from December when most folks were bearish) or spout of smart-sounding phrases like "cumulative imbalances" and "the devolution of social mood" but they know that nobody will care until they're forced to care, and they won't be forced to care until prices are lower. Sounds backwards, and that's because it usually is.

Me? I'm not mandated to take risk and I don't answer to anyone (except my wife, which is an entirely new experience), so I'm content to trade surgically. That approach garnered 60% returns last year, at least until I broke my own cardinal rule and mentioned my performance during a Twitterthon, which of course top-ticked my year (I ended 2012 up mid-40s, which isn't bad but well off my best levels).

The key to that approach is proactive patience, which is to say that you must remain alert even if you're not lugging sizable risk. And, of course, I try to follow my 10 Trading Commandments, which remain as apt today as they were many moons ago when I first shared that fare.

Random Thoughts:
  • Bottoms are points and tops are processes. If your knee-jerk reaction to that statement was "HA! This ain't no top!" then you should really see both sides. Not because it is, without question, a top, but because confirmation biases cost money.
  • You know it won't come easy; there is too much riding on this rally through the lens of the government (the stock market is the world's biggest thermometer) and structurally, given the debt dynamic in a finance-based derivative-laced global economy, borrowing costs and the "all in" mindset from central banks which of course, is designed to shape consumer psychology (which is 70% of GDP).
  • Minyanville was pretty bearish on Facebook (NASDAQ:FB) on the IPO. Conversely, I warmed up to the stock when it reached the 50% retracement of its entire corporate life cycle at $19. The stock has since rallied more than 70% (without me, mind you) and yesterday, when I mentioned that the upside would begin to get more difficult as the IPO price ($38) edged closer, I came thisclose to putting on a starter put position. I didn't.
  • This morning, in real-time on the Buzz & Banter, I bought some Facebook puts for a trade with defined risk on the other side of the recent highs at $33. if Facebook continues lower, we're looking at a double top. If it reverses to the upside, I've got über-tight defined risk...and you can do anything as long as you're disciplined. So you know and if you care -- and remember to define your risk before you put your hard-earned capital at risk.
  • Watch the high-beta realm following the earnings miss -- and 20% melt -- in VMware (NYSE:VMW). Apple (NASDAQ:AAPL) is thus far firm but remember it's already off 35% since September. Google (NASDAQ:GOOG), Amazon (NASDAQ:AMZN), F5 (NASDAQ:FFIV) and Netflix (NASDAQ:NFLX) are pink but not yet crimson, and NDX (INDEXNASDAQ:NDX) 2700-2750 remains the channel and a break either way should prove telling.
  • Yesterday we saw N's over S's; today we're seeing the mirror image which makes sense given we're in the thick of Turnaround Tuesday.
  • Indeed, the banks act well today (sector rotation is on-the-margin constructive, as opposed to outright migration) and while I think the easy trade to the upside is behind us -- and there will be downside opps to make some cake -- I'm looking for a high "quack count" (when my ducks, or trading tells, align) before I initiate risk. Yes, I'll miss some moves, but opportunities are made up easier than losses.
  • The "social toll" of the European crisis is making the rounds overseas, bringing to bear yet again the difference between a stock market rally and an economic recovery. Not that the bulls care, of course.
  • After reading that particular vibe, I shot him an email that said, "Dougie, this is one of your better missives. I've been meaning to write you for some time to say that you're very special. As someone who has been writing in real-time for 14 years, I, more than most, understand how trying it can sometimes be. You seem to be getting better and more fluid with age; I take my hat off to you, and I'm proud to call you my friend."
  • Is it a social media faux pas to endorse your wife on LinkedIn (NYSE:LNKD)? She recently discovered the service and has generated some good business leads, so I was trying to help her along. That effort, however, garnered several, "You can't endorse your own family!" emails, so I figured I would ask ye faithful.
  • Old-school Minyans will remember Full Circle, published back in 2003. That circle will again hit home in March when my pops will meet my wife, bonus twins, and daughter following his string of serious health issues. It's always been on the bucket list so I'm counting the days.
  • Good luck today and remember: Profitability begins within.

Twitter: @todd_harrison

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