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December 18, 2008

Midnight Musings

Tonight's post will be brief because, despite a 2% drop in the SPX, not much has really changed in our setup. I just have a few musings to pile onto yesterday's view. I'll start by expressing my opinion to the question I'm sure is on everyone's mind, which is to say I do not think the mid-term rally is dead. In fact, I believe we will see the next large move upward begin presently.

Obviously, there are a lot of factors that have emerged to spin webs of doubt and anxiety into trader psyche. For one, the dollar has plunged without spurring the monster rally that was supposed to accompany such a drop. But I ask you: who ever thought that bonds would go parabolic in conjunction with a falling dollar? It seems to me that the bond rally has crossed that obscure line from momentum to pure emotion, and fixed income is soaking up all the funds that should be driving stocks higher. I also believe this parabolic run is terminal and very close its demise. When money leaves bonds, expect it to chase equity. If the action plays out this way, why can stocks not rally along with a strengthening dollar? It's not out of the question.

Besides, the weakness over the last two days was not unexpected. As postulated earlier this week, the extreme reading in Adv-Dec volume along with stretched (but not extreme) readings in the put/call ratio, bullish percent, and a MACD divergence were all posing a formidable head wind to price advance. Of course, none of these indicators have yet to move back to comfortable readings, but an advance to the 65DMA would not strain any muscles.

index chart

Despite my optimism, I am grasping prudence tightly. A close below SPX 850, and my longs are long gone.

Yesterday's post highlighted how the recent advance in oil-related equities had occurred on declining volume, boding poorly for those equities as well as for crude itself. Oil stocks plunged 10% today, and oil dropped 6%. I suppose there is information in the volume after all! I stand behind my call that oil will find its footing and surge to $60 very quickly, but I am not silly enough to catch a falling knife, especially one sharpened today by a large increase in downside volume. I expect to see an outright panic day in energy, accompanied by a large reversal. I'll follow that reversal, even if it means buying 10% off the bottom.

On a final note, I suppose December opex could have a lot to do with the market's aimless wanderings over the last two weeks. I'm certain some tremendous hedges were put on... both in the form of futures and options... as the market plunged into the late November low, and the unwinding of these positions could be jerking price around. If so, the market's true intention should become apparent over the next couple of days.


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