The purpose of this post is to explain the opportunity I see on the long side of this market.
Since May 2011 top, supply has overwhelmed demand for stocks aided no doubt by fears of Europe collapsing and the US downgrade. During this time period, the only way a bull could have made money is through excellent timing or holding one of the few stocks that are higher. On the contrary, the only way a bear could have lost money is through timing errors or poor stock selection.
Recapping recent market movements is simple, from January 1, 2011 through the end of July we vacillated between 1250 and 1350. Then in a period of approximately 2 weeks, we plunged 250 points, and now we are in the range of 1120 and 1220 with recent EKG-like lurches to the upside and downside of the range.
Now, we are at the bottom of the range and I find myself turning bullish, as long as we hold above the lower end. There are coincident indicators hinting at buying interest indicating that the market could be on the verge of an intense, powerful rally to reset sentiment and give bears much juicier opportunities. I believe the nature of this rally will be different than the oversold bounces we've basically had the last month and half where holding stocks was punished or at least painful, either long or short. I think the way to maximize one's profits will be by buying and holding stocks for a longer period of time (1-1.5 months). My goal in short term trading is to adapt my strategy to the ever changing market. If I'm right, then hold on and if I'm wrong, get out and reassess.
These are many coincident indicators that point to divergences forming between today and August 8. These include the VIX, the New York Summation Index, and the advance/decline line. The high/lows measure made a slightly higher low, while having its own capitulation, which I believe indicates selling exhaustion in the short term. Pricewise, we have seen the Nasdaq outperform the S&P500 and the semiconductors lead the Nasdaq. Now, its important to understand that these divergences are merely present at market turning points and do not cause markets to turn and they can remain divergent or even be turned around by price.
However, until the range breaks, I am inclined to go long near the bottom end of the range, and I think the depressed sentiment and nascent bullish signs indicate a more powerful rally than most would anticipate. Right now, most of the calls I'm seeing are for an oversold bounce or a immediate break of the range to move lower.
This is the trade – in my real account, I am going to go from 5% long to 30% long on the following 3 stocks – PCX ACI AAPL. If we continue to move up, I will add more. My stops are at recent lows or a break of 1100 on the S&P500. In my model portfolio, I will get even more aggressive with a 60% allocation.
I'm not much of a chart or technicals guy, but I will point out the chart of the New Highs-New Lows index to show the selling exhaustion from the recent sell off, which I think indicates a bounce is in order.
The divergences mentioned above hint at some bullish currents underneath price which could propel the market to a legitimate relief rally, instead of another oversold bounce. I am not arguing the situation will ameliorate itself through monetary magic but merely that the perception of the situation will improve.
Good Luck!
