Professional stock market traders manage risk very closely. In fact, stop loss levels tend to be set almost directly below entry points, meaning they are comfortable owning a position for a few minutes or a few days. If the trade does not work, they get out. Traders look at risk-reward ratios on much shorter time frames than investors. A good trading opportunity is not necessarily a good opportunity for investment.
We believe the current rally is being driven by traders, which is fine. Traders who "played" the current rally will be more than happy to sell at the first sign of trouble, which could come from this week's ISM report, Friday's employment report, or from across the pond. Given the points that follow, do you really believe the current rally in stocks is sustainable?
We believe the psyche of investors is on the verge of reaching a tipping point, which could cause a very rapid decline in asset prices. It is next to impossible to know if and when they will reach for the sell button in unison, but the risk for such an event is elevated and must be considered in all portfolio management decisions. Stocks dropped 34% in twelve trading sessions in 1987. High volatility occurred before that drop, indicating an increased willingness to run for the exits. If you have not noticed, the markets have been volatile recently. An "Oh, my God" type event is difficult to predict, but the conditions are in place to make for an interesting next few months.
While the chart below is busy, the basic takeaway is simple; the S&P 500 faces hurdles between 1,219 and 1,270. Let's assume traders take the market back to 1,270 "“ that represents a 4% gain from the August 31 close of 1,219. If stocks go on to make a lower low later this year, the next logical retracement level comes in at 1,020, which is a 16% drop from the August 31 market close. The blue lines, marked A, are parallel trendlines from recent highs. Points B and C show logical retracement levels monitored by traders. Point D is the neckline from the topping pattern known as a head-and-shoulders formation. As we mentioned on August 12, a rally back to the neckline is not uncommon.
Unless something improves somewhere in a better than expected manner, we are inclined to use the current trader-induced rally to review bear-market friendly assets, such as bonds (TIP, PCY, TLT, IEF) and stock market hedges (SH). We are also keeping an eye on Fed-Friendly agriculture (DBA). We need to see a better entry point for bonds and agriculture. Stock market hedges are looking more attractive the higher the current rally goes. The chart of the S&P 500 below shows the blue trendlines labeled A in the chart above, allowing for a less cluttered review.
Gold (GLD) and silver (SLV) are very crowded trades at this point, which elevate the odds of significant downside in the short-to-intermediate term. We would prefer to re-enter those markets after some corrective or sideways price action. Agriculture may be a good precious metals alternative, but a pullback might be needed first. The chart of the S&P 500 below adds back another form of resistance.
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Copyright © 2010 Ciovacco Capital Management, LLC. All Rights Reserved. Chris Ciovacco is the Chief Investment Officer for Ciovacco Capital Management, LLC (CCM). .Terms of Use. This article contains the current opinions of the author but not necessarily those of CCM. The opinions are subject to change without notice. This article is distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. The charts and comments are not recommendations to buy or sell any security. Market sectors and related ETFs are selected based on his opinion as to their importance in providing the viewer a comprehensive summary of market conditions for the featured period. Chart annotations are not predictive of any future market action rather they only demonstrate the opinion of the author as to a range of possibilities going forward. All material presented herein is believed to be reliable but we cannot attest to its accuracy. The information contained herein (including historical prices or values) has been obtained from sources that Ciovacco Capital Management (CCM) considers to be reliable; however, CCM makes no representation as to, or accepts any responsibility or liability for, the accuracy or completeness of the information contained herein or any decision made or action taken by you or any third party in reliance upon the data. Some results are derived using historical estimations from available data. Investment recommendations may change and readers are urged to check with tax and investment advisors before making any investment decisions. Opinions expressed in these reports may change without prior notice. This memorandum is based on information available to the public. No representation is made that it is accurate or complete. This memorandum is not an offer to buy or sell or a solicitation of an offer to buy or sell the securities mentioned. The investments discussed in this report may be unsuitable for investors depending on their specific investment objectives and financial position. Past performance is not necessarily a guide to future performance. The price or value of the investments to which this report relates, either directly or indirectly, may fall or rise against the interest of investors. All prices and yields contained in this report are subject to change without notice. This information is based on hypothetical assumptions and is intended for illustrative purposes only. PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. CCM would like to thank StockCharts.com for helping Short Takes create great looking charts Short Takes is proudly powered by WordPress . Entries (RSS)
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Copyright © 2010 Ciovacco Capital Management, LLC. All Rights Reserved. Chris Ciovacco is the Chief Investment Officer for Ciovacco Capital Management, LLC (CCM). .Terms of Use. This article contains the current opinions of the author but not necessarily those of CCM. The opinions are subject to change without notice. This article is distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. The charts and comments are not recommendations to buy or sell any security. Market sectors and related ETFs are selected based on his opinion as to their importance in providing the viewer a comprehensive summary of market conditions for the featured period. Chart annotations are not predictive of any future market action rather they only demonstrate the opinion of the author as to a range of possibilities going forward. All material presented herein is believed to be reliable but we cannot attest to its accuracy. The information contained herein (including historical prices or values) has been obtained from sources that Ciovacco Capital Management (CCM) considers to be reliable; however, CCM makes no representation as to, or accepts any responsibility or liability for, the accuracy or completeness of the information contained herein or any decision made or action taken by you or any third party in reliance upon the data. Some results are derived using historical estimations from available data. Investment recommendations may change and readers are urged to check with tax and investment advisors before making any investment decisions. Opinions expressed in these reports may change without prior notice. This memorandum is based on information available to the public. No representation is made that it is accurate or complete. This memorandum is not an offer to buy or sell or a solicitation of an offer to buy or sell the securities mentioned. The investments discussed in this report may be unsuitable for investors depending on their specific investment objectives and financial position. Past performance is not necessarily a guide to future performance. The price or value of the investments to which this report relates, either directly or indirectly, may fall or rise against the interest of investors. All prices and yields contained in this report are subject to change without notice. This information is based on hypothetical assumptions and is intended for illustrative purposes only. PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. CCM would like to thank StockCharts.com for helping Short Takes create great looking charts Short Takes is proudly powered by WordPress . Entries (RSS)
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