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The US Stock Market: Highway to the Danger Zone

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Is the S&P setting up for a quarter-end bender?

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

Revvin' up your engine, listen to her howlin' roar.
--Kenny Loggins

There was a scene in Top Gun when Cougar handed in his wings, giving Maverick and Goose their shot at glory. They performed admirably in the face of adversity but in a grisly twist of fate, Goose was killed.

It remains to be seen if the quarter-end goose will be cooked as well.

Following a spirited rally off of Monday's low print-more than 40 S&P (INDEXSP:.INX) handles in 2.5 sessions-the aforementioned "danger zone" is upon us. Following yesterday's anemic GDP-one so bad that investors posited that the Federal Reserve would continue to support US markets-the technical landscape is demanding the bulls put up or shut up.

The chart, in and of itself, speaks volumes; the uptrend that has been in place since November was shattered last week (a week ago today, actually). Add horizontal resistance at S&P 1600 and the downtrend from recent (all-time) highs at S&P 1687 on May 22 and you've got yourself a triple shot of resistance.

The fact that yesterday had the lowest put-call ratio since May 20-yes, two days before the top discussed above-and we've got ourselves a situation.



In the midst of the madness yesterday, we took a pop quiz that asked: Will This Stock Market Rally Last?

We offered that the rally was likely a combination of four factors:

1. China didn't blow up and Shibor is off its most elevated levels.

2. Less-than-stellar stateside economic news has investors dreaming of a tapered-taper.

3. Quarter-end is on tap and fund managers are fighting tooth and nail to defend their portfolios.

4. Traders are conditioned like Pavlov's dogs to buy dips, with or without a trend line.

I offered that we were likely seeing a combination of the above and reminded readers that on May 8, I wrote that the "directional certitude" in the stock market was as high as I had ever seen it (the S&P was trading at 1625 at the time).

The tape continued to rally for 10 sessions-and 60 S&P handles-before dropping 127 handles the following 23 sessions, which brought us down to the S&P 1560 low this past Monday.

I was reminded of September 8, 2011. Anyone who dared whisper a negative word about gold was taken out back and shot. No joke; I consider myself a pretty moderate guy and I got HATE mail; vicious, nasty, searing words for sharing a bubble comparison chart, with gold among the asset classes.

Gold, after that article, dropped 20% this quick, rallied 17%, dropped 15%, rallied 18%, dropped 14% -- went sideways for almost four months -- rallied 14%, and then began the journey lower with a drop of 30%.



My point -- and yes, there is one -- is that markets, be they gold markets, stock markets, or bond markets, tend to pave a path of maximum frustration. That's always been true but these days it's particularly true.

That's why we have to adhere to discipline over conviction as we together find our way; the destination we arrive at will pale in comparison to the path we take to get there.

Random Thoughts:
  • Goldman Sachs Group Inc (NYSE:GS), Morgan Stanley (NYSE:MS), and Apple Inc. (NASDAQ:AAPL) all acted funky yesterday. If Apple gets to $360, I'm a buyer for a trade.
  • It will be very thin next week given the Independence Day holiday, and the less liquid it is, the more volatility we'll see. Make sure you right-size your positions; the last thing you need on a holiday is a headache.
  • Gold took it in the teeth once more; one has to wonder where the other shoes are in an interconnected marketplace with mad counterparty risk.
  • In this environment, you stay humble or the market will do it for you. I learned that lesson the hard way and it's tattooed on my forehead after 23 years of hitting and taking, taking and hitting. One step at a time as we together find our way.
R.P.

Twitter: @todd_harrison

Follow Todd and over 30 professional traders as they share their ideas in real-time with a FREE 14 day trial to Buzz & Banter.
Position in SPY.

Todd Harrison is the founder and Chief Executive Officer of Minyanville. Prior to his current role, Mr. Harrison was President and head trader at a $400 million dollar New York-based hedge fund. Todd welcomes your comments and/or feedback at todd@minyanville.com.

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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