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Random Thoughts: The Bulls Are in a Zone


The tape probes for the path of maximum frustration.

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

It was a reflective day on Wall Street yesterday as we remembered lost friends and yearned for more innocent times. And there was the requisite reminder that anger and evil can emerge from anywhere at any time, particularly in the digital age.

The bull run has been impressive, particularly given the seasonal setup entering this week. The savvy soothsaying seer Jeff Saut, who is, in my view, as good as it gets, summed up this dynamic this morning with the vibes below:
"We began the stock market's decline in the prescribed mid-July to mid-August time frame. In fact, the stock market's internal energy was totally used up on the exact date of July 19. Subsequently, the S&P 500 (INDEXSP:.INX) peaked and suffered roughly a 5% decline, which was followed by a ~2.5% throwback rally (a 50% retracement) into last Friday's intraday high.

"The resulting chart pattern looked remarkably similar to this year's May 22 to June 18 affair right before a secondary decline took the SPX down into its June 24th low of 1560 for a total pullback of 7.5% (see chart). The recently anticipated correction, however, was halted by the positive Syrian news early this week…and the SPX closed decisively above my 1684 critical upside 'pivot point' yesterday."

He continues:

"A number of my proprietary momentum indicators have turned positive…but I can't shake the feeling that all is not right -- call it experience. To wit, the NYSE McClellan Oscillator is well overbought on a trading basis. Moreover, yesterday's Dow (INDEXDJX:.DJI) Wow (+135 points) masked the VERY weak internal dynamics of said rally, and the sketchy trends of the Supply/Demand Indicators suggest the recent advance will not prove sustainable (the Advance/Decline Line confirms this). I still don't believe this is the start of a big new 'up wave.'"

Jeff goes on to talk about the particular exposure he favors, but the broader takeaway is the haphazard nature of this headline-driven market, which will continue as the Federal Reserve meets next week to map their tapering plans. All the while, psychology continues to drive price; bulls will argue underinvested fund managers are trapped in a long squeeze,and will chase offers into year-end, while bears believe the shorts have covered, which removes a forward layer of demand in the market, and that Syria is a symptom not a cause.

Yesterday, a portfolio manager on CNBC offered that the greatest risk to this market is not being in it; he may be right, but those are the types of statements that get time-stamped with the benefit of hindsight. Yes, the market can trade higher, but there is cause for pause and we would be wise to see both sides as we shape our forward risk profile.

The path of maximum frustration may well be more sideways action, consistent with the green zone in the chart below. That's why these levels are oh-so-important; if we push through, the bulls will claim victory and (what's left of) the bears will seek refuge; fail, and "the zone" will be alive and well into year-end.

The financials, as always, will help light the way, but that may be a tad obvious; folks assume they'll have an out when they need an out and the market doesn't exist to accommodate the masses. Indeed, it is likely the opposite.

Random Thoughts:
  • Once upon a time, we offered that if the stock market was your greatest concern, you should consider yourself fortunate; there's a big difference between loss and loss.
  • I was waiting for the iPhone rollout before making any decisions on my next smart-phone; color me underwhelmed, and it would appear that a lot of other people were as well. $463 is a level to watch if the Apple (NASDAQ:AAPL) falls far from the tree, as it's the confluence of the 50- and 200-day moving average (low tick was $464 and change).
  • S&P 1688 (the May high, and where we are now) is the next technical resistance, while S&P 1670 (the 50-day) is a level they'll look to hold (to avoid chatter of a pop and drop).
  • Stan Druckenmiller weighs in on the specter of Fed tapering; I, for one, pay attention to his views.
  • I'm not sure who would want to assume the position Chairman of the Federal Reserve; seems like a pretty thankless task given the social mood surrounding the task at hand.
  • Which is why Money for Nothing is such an important documentary; the first step in fixing a problem is admitting we have one.
  • This was my initial reaction to those tweets yesterday morning.
  • Festivus 2013 will be held on December 6 in New York City. Tickets will be available starting next week. It's a terrific time-and it's for the kids!

Twitter: @todd_harrison

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