May 8, 2013

Logical Market Update: Another Day of Record Highs for the DJIA, S&P 500 and Russell 2000 – Complacency Turning to Apathy?

The DJIA, S&P 500 and Russell 2000 Continue to Push to Daily New All Time Highs.  Treasuries Maybe Ready to Turn Along with the Dollar and Precious Metals


Even day trading was a snooze fest on Wednesday as the broader indexes continued to churn higher into record territory.  The complacency as to understanding the reasons remains overwhelming to many.  The Status Quo is changing and it appears that massive levels of denial are in full force.  The belief that the government will continue to keep the bubbles inflated is what continues to bring additional monies into the markets.  Let’s face it Mom and Pop are no longer willing to sit with a 0% interest rate on their money while the “fat cats” at JP Morgan Chase, Bank of America, Wells Fargo, Goldman Sachs, Citigroup and Morgan Stanley rape pillage and stuff their corporate pockets with the spoils of the Bernanke Asset Bubble. 


The Bernanke Asset Bubble, has the Fed chairman getting even more aggressive with his money printing… Bernanke will add $1 trillion to the Fed’s balance sheet this year – bringing the total debt to $4 trillion. And the Fed won’t raise interest rates “as long as inflation isn’t forecast to rise more than 2.5% in the future and as long as unemployment remains above 6.5%,” according to the Fed’s statement last December. Take a look at the chart of the S&P 500 below to see how this type of monetary policy has pushed unwilling participants back into equities as the hunt for “alpha” continues. 



But even the Bernanke Asset Bubble corrects before pushing relentlessly higher.  And please do not be fooled.  The correction I am expecting is not the “end of the world” correction being called for by many.  No, that is not what I am looking for – at least not in the next year or so. 


Consider what Seth Klarman, founder of hedge fund Baupost Group wrote in his most recent letter to investors regarding today’s complacent market environment

Most U.S. investors today have a clear opinion about what everyone else has no choice but to do. Which is to say, with bonds yielding next to nothing, the only way investors have a chance of earning a return is to buy stocks. Everyone knows this, and is counting on it to remain the case.


While economist David Rosenberg at Gluskin Sheff believes government actions could be directly or indirectly responsible for as many as 500 points in the S&P 500, or 30% of its current valuation , traders have confidence in Ben Bernanke because betting that his policies will drive equities higher has been a profitable wager.


Bernanke, likewise, is undoubtedly pleased with these speculators for abetting his goal of asset price inflation, though we all know that he will not call them first when he decides to reverse direction on QE. Then, the rush for the exits will be madness, as today’s “clarity” will have dissolved, leaving only great uncertainty and probably significant losses.


Investing, when it looks the easiest, is at its hardest . When just about everyone heavily invested is doing well, it is hard for others to resist jumping in. But a market relentlessly rising in the face of challenging fundamentals–recession in Europe and Japan, slowdown in China, fiscal stalemate and high unemployment in the U.S. – is the riskiest environment of all.

Source: Zero Hedge Blog


The markets remain extremely overbought and trading ranges are shrinking along with volumes.  This again is showing exhaustion of the current move.  A time when buyers and sellers are not willing to step in leaving the daily grind to day traders, professional money managers, hedge funds, and the algorithmic computers.  And I’ve been hearing from many other day traders who are not trading that much these days. 


Remember, an efficient market will always trade to volume.  At the moment the search for volume remains to the upside, even though so many remain suspicious that the volume will be found at lower levels.  So it becomes a game of patience.  The shorts are not budging and the longs aren’t either – not yet anyway.  

Observations from Wednesday


The Russell 2000 has had its moments lately with one day being the percentage looser and the next being the percentage gainer.  For a short period it did look like the Russell was not going to joint the other broader indexes in moving to new highs, but that is no longer an issue.  It has though, created a situation where a stronger more pronounced correction is likely.  If we consider the current highs at the completion point for the advance that began off of the June 2012 lows.  First support for a correction would come in at 913 with the more likely zone being at 878.  The momentum oscillators (near-term) are back to extreme overbought levels with the mid to longer-term oscillators remaining overbought. 


Comparable levels for the DJIA begin at 14580 with the more likely zone being at 14090 to 13777.   For the S&P 500 first support is at 1567 and the likely zone comes in at 1524 to 1489.  Here as well, the momentum oscillators are sitting at extreme overbought levels and volume levels have dropped off substantially over the past couple of weeks. 


I am still keeping track of the discernable rotation that appears to have caught some momentum as money is pulled from the biotech sector and back into the technology sector.  I continue to favor MSFT, AAPL, and INTC to name a few of the titans and still believe they will become very attractive if and when the broader markets pull back. 


Adjusted Support levels for a Larger Correction.

DJIA – initial support is at 14750, and then the 14480 to 14450 area, but eventually downside momentum may prevail with stronger support coming in at 14090 to 13777.


S&P 500  – Resistance is at 1645 to 1650.  Support is at 1590, 1578, 1535 – 1524, and then 1489.


Russell 2000 – First support should be found at 912, and 906.  Ultimately, it remains highly likely that it could get very ugly for the Russell 2000 with stronger support seemingly far below at the 877 to 850 area. 


The Diversified Trading System used together with Trade Manager should continue to produce numerous trading signals in the DJIA, YM (mini), S&P 500, ES (mini), RUT, TF (Russell 2000 mini), AAPL, AMZN, GOOG, NFLX, and LNKD and GS. 


Here is an updated list of the markets where I have found that DTS (all three birds) are producing numerous signals:

  • DJIA future (e-mini available)
  • S&P-500 future (e-mini available
  • US$/Euro futures (e-mini available) – very highly recommended
  • GS (Goldman Sachs)
  • AAPL (Apple Computer)
  • GOOG (Google)
  • LNKD (LinkedIn)
  • NFLX (Netflix)
  • 30-yr Treasury Bond future
  • 10-yr Treasury Note future
  • TLT (Treasury Bond Long ETF)
  • TBT (Treasury Bond Short ETF)


Day Trading vs. Position Trading


Recent discussions have revolved around the necessity to toss out most if not all of your old trading ideas and join the ranks of algorithmic trading.


I advocate the use of overbought/oversold indicators and momentum oscillators to indicate where money is flowing, where an imbalance of buyers or sellers occurs and a  “bull trap” or ”bear trap” forms.   


I believe that it only gets more confusing going forward as the market ignores “the writing on the wall” and continues higher with a false sense of security built on negative input.  Price volatility has increased with the broader averages easily moving 2 to 3 percent and as high as 10 percent intraday.  Many stocks have seen daily trading ranges average between 10 and 15 points, with one day being 15 points higher and the next being 10 points lower. 


This type of action is the primary motivation behind my advocating switching strategies if necessary and focusing on day trading and less on position trading.  I do believe there are discernable longer-term positions investors should consider and implement, but the near to mid-term market gyrations have produced far more profitable day trading opportunities without overnight risk. 


I continue to recommend the best trading platform available to a broader range of traders from novice to expert.  The Diversified Trading System offers a cost effective product that allows a trader to enter into the “chaos” and trade more effectively.  


Trade Manager from Indicator Warehouse automatically calculates the correct amount of contracts or shares based on your account size or market volatility.  Automated stop-loss management and position sizing eliminates most of the problems most individual traders have.  Day trading and position trading both require (actually demand) good risk management.  Trade Manager does the job across the board and is an essential trading tool that ensures that you take the maximum profit from all your trades.