In the back of my mind I know that it’s not smart to get involved in this market, it’s still broken, there are so many issues, including some important technical hurdles that need to be overcome.  But only price pays, and you need to pay attention to what the market is telling you.  We may be in a bottoming process right now on the intermediate term time frame.

The key is to have an open mind to any scenario, and be prepared to get long when the time comes.  Build your lists carefully.

Here is the laundry list of stuff that I want to see happen to start taking long positions again.

The $EURUSD needs to get back above 1.215 and hold there for a day or two, at least.

The $SPY needs to get back above its 20 day moving average and put in a large volume move to the upside.

Tech needs to lead on the upside for a day or two.

The long bond $TLT needs to break down.

Several equity sectors need to break their downtrend lines from the past five or six weeks.

Once again, my gut tells me we roll back over and break support at $SPY 104.50, but I’m prepared to get long and make some money if the market allows.

These are all reasons to be cautiously bullish on a short term time frame, to trade from the long side for a bounce here.  I think it’s entirely possible that we are headed back up towards the 112.50 area.

And now the bearish argument, which as you are about to see, has just a little more ammo.  The market was rejected by a retest of the 200 day moving average on Friday afternoon.  We’ve now filled the gap produced on the open of the May 20th.  This bounce is coming on progressively lighter and lighter volume.  The bounce is beginning to look like yet another rising wedge, a bearish pattern.  The market has not been able to string two good up days together in, well what seems like forever.  We are below a falling 20 and 50 day moving average.  Volatility is still quite elevated, the $VIX is trading above 32.  The bounce in crude seems like it’s running out of steam and the drillers and oil service names will continue to get punished until they plug that damn hole in the gulf.  Breakouts from momentum and relative strength names are few and far between, and those which have broken out have done so on light volume and begrudgingly.

So where does that leave me?  Well, I’ve still got about 10% of my book tied up in short positions in $STD and $XRT.  Given that there could be a short term bounce brewing here, I don’t think it’s time to be piling on new short positions, but for the momentum strategy I run, getting involved on the long side right now is like picking up pennies in front of a bulldoze, it’s just not worth it.  I would rather preserve my confidence for when this market shows far more signs of being healthy than try and trade in and out of breakouts looking for a few cents.  I’ve effectively been out of the market save a few short positions for six weeks now.  In that time I’ve picked up an amazing amount of alpha, and even some absolute return with my well placed shorts.  But more importantly, I’ve been able to take some time away from this market, step back and survey the damage, have a clear head.  By not being involved on the long side I’ve been able to see this market without bias, as much as one can.  I just don’t feel it’s time to get involved yet, although I’m starting to feel that itch.  I don’t mind sitting out for another month or two, you’ve got to take what the market gives you, and right now it’s just not my time.  If we set up on the short side again here in the coming week or two, I will most likely take a bit more exposure on that side.  The intermediate term trend is down for sure, and quick money can be made given the volatility.  Stocks take the stairs up, but the elevator down, an old saying on Wall Street.

For the week the momentum book gained 20 basis points of absolute return but lost 5 basis points of alpha.  I didn’t trade at all last week.

Nothing that I say or show on this blog should ever be considered investment advice or a recommendation to buy or sell any security.  The performance numbers that I post in the momentum book should never be regarded as representative of any specific client account managed by Surfview Capital, it is there solely for educational purposes and should be treated as such.

My ultimate target for this rally off the February lows has been 1230, although I did think we would have seen more of a pause or pullback at 1200.  Guess what, we’re pretty much there, the $SPX hit a high of 1214 yesterday before putting in a very bearish doji candle.  I began to take risk off the table yesterday afternoon as I believed everything was just way too extended, profits needed to be booked.

And then the Goldman news struck today.  We’re currently down great than 1.6% on the $SPY, not quite your garden variety sell off, but in the scheme of things, not really a big deal.  What is a big deal is that the news market is back in full tilt, and it comes at a time when technically we should start to see major resistance in the equity markets.  So, it’s time to take some more risk off the table.  I have pared back exposure today, I’m now +25% in cash after adding a long position in $SWKS today.

Here’s what I’m looking for.  The $SPY will rally back up to the declining 5 day moving average over the next few days which can be found around 120, at that point I will watch very closely for resistance and a roll over.  If it fails that level, I will be a big seller, pulling exposure back to around 40-50%, possibly less.  That type of action, a lower high, could mark the end of this rally and a signal that consolidation if not a major pull back is upon us.  I was always taught that you make your living by collecting alpha in down markets by playing defense and striking hard and fast when the market is healthy.  It is now time to get defensive, I’ll be watching a failure of the 20 day moving average very closely as well.

It’s not the news you should be paying attention to, it’s how the market reacts to it.  The market is obviously spooked, and if a negative feeling about Goldman Sachs $GS persists beyond a few days, it will put a vice on this market.  More on the news itself late, just because I love bashing idiocy.

The market opened extremely strong with energy and materials leading the way, but the clamps were quickly placed on the market as $RIMM began to tank.

Although $RIMM is only a little more than 2% of the $QQQQ, it still weighs heavily on investors minds for some odd reason.  It’s not really a bell weather stock anymore, it’s growth has slowed considerably due to its inability to innovate.  If you want the rest of that rant just watch yesterday’s video.  Anyway, $AAPL on the other hand is more than 16% of the Qs, 16!, while no other stock is greater than 4.5%.  How this is the case I have no clue, but it’s true, which means that Apple really is the Qs.

And because of $RIMM, the $QQQQ broke some important levels today, ultimately closing flat.  Technical damage was done though with the uptrend broken and the 48.10 level breached.  There is major distribution going on here no doubt, the question is, will energy, materials, and financials be able to hold this market together while tech lags?

Each of those 6 green arrows represents a major bout of selling and distribution.  The $SPY did manage to hold the support level at 117.10 today and did recapture the all important 117.50 level into the close, as well as holding the uptrend line.  Technically the broader S&P 500 is still healthy short term and looks to go higher next week.

I loaded the boat this morning at around 11:30 after the first pullback, buying a large position in $DRQ, more $NUS, and a position in gasoline via $UGA.  By the end of the day all three were well in the green, especially $DRQ which landed me greater than 3%.  I’ve been wanting a piece of that stock for a long time.  I did sell a 1/4 of my $VLTR position which broke out huge this morning.

I may be a little bit more paranoid than is warranted here because I am completely loaded, 2% cash now, but my guard is up for a quick strike on this market by equity holders with big gains to protect like myself.  If next Monday opens strong this market should be clear for 1200, if we open weak, especially in tech, I may begin to lighten up.

Remember the market is closed tomorrow for Good Friday, happy Easter to all of the gentiles out there, I will have a Cadburry Egg in your honor for sure.

Last 2 days.

The last week.

Since the February 5th bottom.

As you can see, value is kicking ass over the course of this rally, especially over the past few days.  An anecdotal observation, the financials and casinos have had quite a run over the past few weeks, which makes sense given this data.  As well, the “junk stocks” are flying again, we saw this data in the chart post by @VPgradient on the 13th here.

It’s getting too easy to make money on the long side here, the 14 period RSI on the $SPY is trading at 100 right now.  Have any of you ever seen a 100 reading on an index RSI?  We need a pullback here, or at least a consolidation for a few days.  I believe we are seeing a replay of the July short squeeze, which means there is probably another 4-5% left in this move.  This would line up with my ultimate target of between 1200 and 1250 on the $SPX.  Are we going there next week, I doubt it, this will continue to be a slow motion melt up.  Wait for stocks to pull back where better risk / reward entries can be taken.  But for god sake, stop buying volatility in the form of $VXX and STOP TRYING TO SHORT THIS MARKET!