Waiting for New Market Uncertainty to Settle

With Barack Obama in as the next President and the uncertainty of the election now over, a new uncertainty has developed in the market with the Dow plunging nearly 1000 points in the two days following the election, setting us up for a possible retest of the lows of the correction in the coming days.

In my last report I warned that the market had come too far too fast with diminishing buy volume and to wait for opportunities on a pull back.  The night of the election, I told my premium members:

The moment of truth will soon arrive and by tomorrow morning I would imagine we'll find out who the next President is.  I expected a big market rally, but I never believed the market would rally as it has ahead of this election.  Heck, the Nasdaq is now up 6 straight trading days.  The S&P is up 18% in the same time and the Dow is up nearly 1500 points.  Yes, there is some room to run and I suppose the market could be up again tomorrow for the 7th straight day in a row for the Nasdaq, but consider that buy volume continues to diminish across the board with big overhead resistance all the way up. 

... the VIX is also hitting some big support at the 50 dma around 45 indicating traders getting a bit too complacent.  We could also be in for a "sell on the news" situation, particularly if Democrats get the 60 seat majority in the Senate, the threshold needed to overcome filibusters that the minority can use to block legislation.

So, with the Dow down nearly 1000 in two days and the market up on Friday despite another ugly unemployment number, is now the time to start adding new long positions again?  Of course, those that have long time horizons, getting into high quality blue chip type stocks probably isn't a bad bet down at these levels but I'm a shorter term momentum player with hold times times of a couple weeks to a couple months. 

The selling on Wednesday actually wasn't all that intense despite the 500 point move down, indicating relatively orderly profit taking.  The selling intensity picked up a little bit on Thursday, indicating some distribution going on.  It appeared we had a bit of selling the rumor and buying the news this week with traders clearly skittish about Friday's jobs number and getting in front of it by dumping positions.

When the number came out worse than expected but not catastrophic, a relief rally ensued, albeit a weak one.  With Thursday's higher volume selling and Friday's low volume buying I have to believe that we're headed lower still, possibly retesting the lows of the correction at some point. 

My current trading strategy leans a bit to the bearish/neutral side and I won't be adding too much additional long exposure until this market settles down a bit and buy volume comes back in indicating that institutions are putting money to work.  We haven't seen big buy volume since Oct 28th. 

It's a relatively light week next week in terms of economic numbers and earnings are beginning to wind down.  All eyes will be on retailers as some report earnings Thurs/Fri and retail sales numbers come out Friday.

Comments

[Urbane Gori...:]

Profit taking on the news that Obama was elected. jegan

2008 Nov 09 04:45 PM