Repositioning to the Short Side

Last week our signals went to the "Red Flag Flying" mode which means we anticipate lower prices ahead. The S&P 500 was down -2.6% for the week and the Dow -3.0% but underlying that activity was a major shift to "sell" signals in multiple stocks, ETFs and trend following indicators.

These can be quite accurate indications of a trend change when confirmed as they were last week and so I expect the rally to stall here and reverse. This Monday at the open, we repositioned our portfolios to the "short" side.

How low the market might go is unknown, of course, and nobody can tell you for sure what kind of correction we might have, particularly in today's volatile environment.

On the S&P chart below you can see that it calls for a Bearish Price Objective of 850 and that there is support at 905 and again at 880. A drop below 880 could easily lead to a more significant drop and breaking the bearish resistance line at 835 could lead to a retest of the March lows.

Chart courtesy of StockCharts.com

Particular weakness is showing up in banks, real estate, and building and across the world in emerging markets, Asia and Europe.

The View from 35,000 Feet

Last week the Obama Administration put forth some sweeping changes to the financial system including higher capital requirements and less leverage for banks which seems a lot like closing the barn door after the horse has left, but perhaps these proposals could help to avert future financial crises like the one we've just come through. And are still going through.

Three banks failed last week, bringing the year's total to 40 and housing starts were up in May. This week the market will turn to earnings reports from Oracle (ORCL), Palm (PALM) and Micron (MU) in the tech sector, Lennar (LEN) in the homebuilding sector and Bed, Bath and Beyond (BBBY) in the retailing sector.

The Federal Open Market Committee meets Tuesday and Wednesay and the Treasury will attempt to sell another $100 billion in debt this week, a record for two, five and seven year notes.

Treasuries put on their best performance in over a month last week as consumer prices dropped -1.3% year over year in May, the biggest drop since 1950.

So far the government has spent $12.8 Trillion of our money on stopping this recession and that adds up to real money as it's close to the entire US GDP for all of last year.

The Week Ahead:

Tuesday: May Existing Home Sales,

Wednesday: May Durable Goods Orders, May New Home Sales

Thursday: Weekly Jobless Claims, 1st Quarter GDP Final

Friday: May Personal Income, May Personal Spending

Sector Spotlight:

Weekly Leaders: T Bonds, Inverse ETFs

Weekly Laggards: Energy, Emerging Markets, Industrials

Disclosure: TLT, RWM, DXD, YCS

Comments

[Mad Hedge F...:]

Good move. If you had any doubt, take a look at the insider selling figures for April and May. Corporate selling of stock has soared from $10 billion in April to $63 billion in May. Insider selling jumped from $1.9 billion to $2.2 billion, an enormous amount. Who were the suckers? Inflows to mutual funds and ETF’s ballooned from $7.0 billion to $10.3 billion. Retail investors are always the ones who ring the bell at the top of a move. That explains why dozens of technical indicators are rolling over. They’re are not signaling a crash, but they are not saying we are going up any time soon, either. If for whatever reason you can’t get out, sell short dated calls against all of your positions.

Jun 23 10:19 AM