Our indicators tell us that fewer and fewer stocks are participating in the up moves. Hardly the action that accompanies a broad-based vigorous bull market. The list of invitees to this party is quite limited indeed. Remember, outside of the DOW and the S&P500, there are thousands of other stocks, and they don’t look as good.
The crushing of oil prices has really been the driving factor behind the market’s recent run. Energy-led inflation has been every central banker’s proverbial “monster under the bed,” and they are elated to see oil get pushed down to the $60 area.
To this trader, there isn’t enough fuel yet to ignite a powerful, meaningful and sustained rally. The news from the Fed is excellent, the financial stocks continue to trade well, but the US consumer is hurting. Losing access to home equity lines of credit has put a serious crimp in the pocketbooks of many Americans. Cheaper energy prices will help the US consumer greatly, enough to prevent a recession but not enough to prevent a slowdown of US growth.
In the Goldilocks world that we currently find ourselves in, I don’t see a collapse, and I don’t see a vertical move. What I see is a continuation of the “middling market” syndrome that has plagued the markets since May. What I will tell you, though, is that if the Fed cuts interest rates or makes meaningful statements that they are moving to an accommodative stance, then you’re going to want to get long, and long in a big way in a hurry.
But there is a lot of ground to cover before we get to that point. Chairman Bernanke is going to be very cautious about making that type of statement. He knows that we’re just one hurricane, one bomb, one Iranian temper tantrum away from $80 oil again, and so he will play it very carefully.
The longer term indicators we use point to higher prices, but the shorter term indicators point to a pullback first. This pullback should be used as an opportunity to go long stocks, especially the financials which will do very well in a declining interest rate environment. Oil is poised for an oversold rally and there are some profits to be had for the fleetfooted.
A great way to play the short side here is to use PUT options. Put options allow you to predefine your risk (i.e. you can’t lose more than you put into them.) You want to focus on stocks at the very top of their trading ranges and, ideally, have already reported earnings. This is because the bulk of the good news has already been priced into the stock. That means in lieu of more good news, the line of least resistance will be down, not up. Many of the brokerage stocks fall into this category. Remember perfect timing is a myth, so if you’re buying PUT options, buy half positions first, then the other half if the stock rallies.
By the way, anybody notice that the Israeli invasion of Lebanon has become a non-story? Remember how just a few weeks ago the talking heads were hammering you with end of the world scenarios? Do you remember how afraid everyone was to own stocks? Look where we are today, up significantly from that war-induced low.
Remember, when it’s hard to buy, you must buy; when it’s easy to buy (like now,) you must sell (go short, etc.)
The overall bigger picture is a bullish one; it’s the short-term picture that really bothers me.
Chief Investment Officer
ETF Master Trader