What Worries Me…

After a brutal week for the bulls, I am still some what concerned.  The NASDAQ, due to terrible earnings by FNSR, dropped 2.5% last week, which in “Normal” markets would not be a huge deal.  However, we are not in normal times.  Rests or pauses in the market are fairly common and are actually quite healthy for the ebb and flow of stocks.  I have been looking for a pullback of 5%-10%, followed by another leg up in the market before we get an actual sell-off.  A major concern still on the table is the end of QE2, scheduled for this June 2011.  If the Fed refuses to continue buying treasuries, I think we could see a rapid sell off in both US treasuries and equities at the same time.  Leaving investors running into cash.  The Federal Reserve technically left QE2 completely open ended, meaning they may not have to necessarily announce they are creating QE3, 4,5 etc, but instead may try a sneaky move of just continuing their billion dollars of purchases per day, flooding the market with excess liquidity.

While my first instincts are to always take a macro picutre, I then move on to fundamentals, which have not seemed important over the last year as Technical Analysis has ruled the day.  While I look at several things on a chart, my main indicators are trend lines.  The S&P 500 has maintained a solid uptrend for 7 MONTHS now.  During this “melt-up” we have had very few pauses and only once even penetrated the 50 day moving average, which happened a second time this past Thursday.  Their are two charts below showing both the daily and weekly trends in the S&P 500.  As you can see we broke trend this past week on the daily and weekly charts, closing below the lower trend line, which means a trading rule has been broken.  Trading rules once set and proven are not to be argued about, leave the emotion out of the decision and simply follow your rules.  While the market could bounce right back up and regain its uptrend, we will look to get back in at that point.

S&P 500 Daily Chart

S&P 500 Weekly Chart

We remain cautious, and will keep a hefty wad of cash on hand to take advantage of the market break, whichever way it may trend.  The market did however manage to close above the 5o day moving average on Friday's rally.  Oil took another breather Friday as the Saudi Arabia “Day of Rage” was a total non-event.  However, our prayers go out to all those who suffered or with family in Japan, as one of the largest earthquakes caused a Tsunami off the coast of Tokyo.  One would think that such a large economy like Japan would have a further affect on the the stock markets around the world, but the S&P managed to brush all concerns aside and rally into the close.  On Thursday the CBOE Put/Call ratio closed above 1, signaling near term oversold conditions, which most likely meant the bulls would be out on Friday, which they were.  On Thursday I sold the long United States Oil Fund (USO), but left the short Brent Crude ETF (BNO) in place.  If you remember back to the WTI-Crude Brent Spread I put on in the portfolio in order to take advantage of a huge move in the spread between the two, that normally doesn't occur.  (Refer back to Post here:  Playing the Crude Spread)

On Thursday and Friday Bunge  Limited (BG) and Lam Research (LRCX) were also sold as they broke below their up trend lines.  While the fundamentals remain intact, my technical rules say “sell” and get out of the way in case we see further downside.  Now that they are sold, they will most likely go up in my face, but once again rules and stop losses will save you from Big Losses, that could wipe out your entire portfolio.  In choppy market conditions like these, it is better to live to fight another day, then risk more capital then you are willing to lose!

As a side note check out the 1-minute chart on Silver Trust (SLV).  Thursday when the markets sold off hard, Precious Metals also took a hit, which is a reminder in a liquidity crunch nothing may be safe.  My rule of thumb is normally to buy Silver or Gold on any pullback, as buyers have been quick to come in an replace any selling.  Obviously, this may not work forever, but long term inflation is a given, not a hope!  The daily chart below shows the pullback on Thursday and strong rebound on Friday.

SLV Minute Chart

SLV Daily Chart

An idea I have been watching for a break out above the downtrend is Sohu.com (SOHU), an internet company in China.  One of the most powerful chart pattern moves in stocks have come as the downtrend on a chart has been broken, and a new uptrend is formed.  Obviously, I have already screened fundamentals and then simply wait and watch for those companies to present an opportunity to enter the position.  Unfortunately, I didn't actually pull the trigger, due to my bigger macro picture and near term caution. The opportunity may still be present, but it had a great breakout of nearly 6% on Friday.  Maybe next time I will actually listen to my own analysis!