This Week's Market Challenge

The challenge of being a one-man show is that you lack the depth of debate. I would love to sit around a table and discuss the day’s news with like/unlike minded individuals to assess the impact of events, but since I do not have this, I read and watch a lot (a lot) of information to gain multiple perspectives.

With the SP500 approaching what I think to be a major resistance point (200SMA), I must ask the all important question… is my thesis correct?

As a trader I primarily listen to the market, and trade around what it is telling me. But every now and again the market is wrong. So… is the market correct or is it wrong?

Bullish case for a rising market:

1. Treasury’s rate rising signals, IMO, an increase tolerance to risk and benefits the stock market (there are other interpretations of the treasury sell off, but this is how I view it)

2. Inventories are too low and the replenishing of them spurs economic activity (although retail inventories will stay at very low levels as the personal savings rate continues to rise and consumer credit contracts)

3. Volatility is declining

4. The financial media has become blindly bullish (potentially leading to exaggerated moves upward, adding to the bullish case very short-term.)

5. Perceived stability within the financials, especially as the CDS market dictates via the declines (although a big chunk of this is on the back of PPIP)

6. Global trade stability via the Baltic Dry Index

The above leads for a very real justified bottoming of the stock market, especially from the levels we bounced off from (660 level). The question now becomes… is further market upside justified? In my opinion, for more upside we need economic growth, so profit growth can return.

Neutral case for the market going forward:

1. Commodity inventory levels (specifically Copper and Oil) are pretty high with respect to current demand

2. The Baltic Dry Index has stabilized, but is not growing from the 2000 level.

3. The consumer is still saving at very high rates (good for them, but bad for 2/3 of GDP)

4. Consumer credit is contracting, despite the newfound stability of the banks.

5. Jobless rate at 8.9%, increasing the default rates and why #4 is taking place.

The above reasons should be taken care of by the global stimulus packages in progress, and this is why I remain bullish.

Now the trader in me has an opinion…

Will the market continue its current momentum? The SP500 rallied 8 of the last 9 weeks, with the down week barely being down

In my opinion, this type of move needs to consolidate given the neutral reasons given above, especially given its overbought condition.

Looking at my charts, the semis caught my eye. They broke their high momentum support.

Despite my initial purchase of Nvidia (NVDA) yesterday, the above chart lead me to think the semis have more room to go down. But what I find most interesting is that the Semis are a leading indicator to the market. As the market was turning on March 9th, the semis broke out and started their uptrend, which lead to a more secure sentiment concerning the market move to high 800s. Now the semis are indicating the high momentum move via the market is ending.

The Nasdaq is obviously indicating the semi weakness at its 200SMA.

This should start getting translated to the SP500 as well, especially given its current level and overbought condition

I am expecting the SP500 to consolidate via the oscillators which should translate to an SP500 of 870-880. Given the sheer bullish attitude at the moment, 940-950 may be achieved next week, and I will short heavy for the pullback.

Comments

[Market Sniper:]

The market is not right or wrong, the market IS. You have some good thoughts. They are the thoughts that go through every trader's mind. Depends on what time frame you trade in. Just use good stop discipline and trade proven setups. Keep thinking but trade what you see, not what you think.

May 11 11:17 AM

[Missing_Link:]

Interesting analysis, though I find it strange that you only present the "bullish" and "neutral" arguments and not the bearish.

I agree that the market is likely to meet strong resistance if it attempts to push past the 200 dma.

This is going to be quite the decline with so many people waiting to sell and/or short at the first sign of a serious pullback.

May 11 11:19 AM