What to Do in This Market? Just Stay Put for Now

We’ve entered a type of investment limbo.

With the S&P 500 up 37% since its lows, it’s difficult for the bulls to make the case that there are far greater gains coming (especially considering the worsening economic data which I’ll detail in a moment).

However, from a technical perspective, the S&P 500 has just staged a bullish crossover (when the 50-DMA crosses above the 200-DMA), which is generally considered an extremely bullish move. Indeed, the last time we saw this happen was the market bottom in 2003. In the five years following this, stocks nearly doubled, with the 50-DMA remaining above the 200-DMA the ENTIRE time.

Thus, the bulls are torn. From a technical standpoint, stocks are indicating what could potentially be enormous gains in the future. But with a 37% gain in three months (not to mention the fact that stocks have essentially traded sideways since May) it’s difficult for even the staunchest bulls to find the incentive to buy right this second.

However, it’s equally difficult for the bears to go short. This rally has sucker punched the shorts countless times now, particularly when it comes to late-day market manipulation. In a nutshell, every time stocks begin showing signs of breaking down, someone steps in, usually during the final 30 minutes of trading, to push the market back into positive territory. So while economic fundamentals indicate we’ve come much too far too fast, it’s hard to make money trading based on this information.

Stocks (the S&P 500) have come 37% since their intra-day bottom of 666 on March 6. This is a tremendous move, far exceeding the underlying fundamentals. Typical bear market rallies rise 20% from the lows into economic recovery. Indeed, we usually don’t see a 40% gain until we’re nine months into the recovery. Thus, even if the recession ends in September ’09 as the current consensus believes (I don’t), the market is already priced to where it should be in June 2010.

To rephrase the above thoughts, stocks are currently trading where they should be a full year from now assuming that the economy turns around this fall. This hardly makes a strong case for greater gains or more upward momentum. But it’s hard to go short with the historic rig that is currently taking place in the market.

So my advice to anyone right now is to stay put. This week is a wash anyhow due to it being short and due to performance gaming: portfolio managers and institutional investors pushing stocks higher so they can close out the quarter with gains on their positions. Indeed, yesterday’s market volume on the NYSE was the lowest we’ve seen since January 5, 2009.

So don’t open any new positions for now. This week will be exceedingly choppy. And with volume drying up to a trickle, there is potential for some violent swings as the big boys play around with their end of the quarter shenanigans. You don’t want to be on the wrong side of one of those swings.

Good Investing!

Comments

[dcb:]

good advice.

Jul 01 06:29 PM

[Tony Petroski:]

Shouldn't the "big boys" be on vacation this week?

Jul 01 06:48 PM

[Market Sniper:]

Yes, good advice. Might take a straddle option position in one or more of the broad market indexes for July, August and/or September. Should move fairly large in one direction or the other.

Jul 01 06:52 PM

[Jimbob:]

Look at the chart above. A Head & Shoulders has just been created. Very bearish - look out below.

Jul 01 07:06 PM

[Fighting Yoda:]

Market will always do the unexpected- it has its own mind - manipulation/speculation that is always the MO in the market. Yup - stay away should be the strategy - fundamentals will reassert ultimately - when no one can predict.

Jul 01 07:21 PM

[Market Sniper:]

To confirm head and shoulders, need SPX at 8800. And EVERYBODY is looking at that. That is bothersome in and of itself.


On Jul 01 07:06 PM Jimbob wrote:

> Look at the chart above. A Head & Shoulders has just been created.
> Very bearish - look out below.

Jul 01 07:45 PM

[untrusting ...:]

Very good summary by the author and yes, it is good advice. Almost impossible to trade a seriously manipulated market such as this one. Only safe choice is to sell a few option contracts. Best bet, IMO, is selling put options at strike prices near the Mar lows. If you have any long postions, covered calls should also be pretty safe bets.


On Jul 01 06:29 PM dcb wrote:

> good advice.

Jul 01 10:24 PM

[Larry House:]

Totally agree.

Jul 01 11:07 PM

[bartpr:]

this indicator at this point is meaningless. look at the 10 and 20 week averages. the 10 is way above the 20. historically in an upmove the 10 will come down to the 20 before any further upmove. this has yet to happen. so expect some downward move in price in the next two months. if the 10 goes below the 20 then worry.

Jul 02 09:27 AM

[the humble ...:]

Is this not an inverted head and shoulder which would be bullish rather than bearish?


On Jul 01 07:06 PM Jimbob wrote:

> Look at the chart above. A Head & Shoulders has just been created.
> Very bearish - look out below.

Jul 02 01:15 PM

[relaplan1:]

The economic effects of Cap and Trade, Obama's Health Care, Ineffective Stimulus, and massive Money Printing are damaging to the competitivness of US industry.......Bail Out!!!

Jul 02 05:18 PM

[Old Trader:]

Judging by today's markets, it appears the PPT left for Bar Harbor a tad too early...*VBG*.


On Jul 01 06:48 PM Tony Petroski wrote:

> Shouldn't the "big boys" be on vacation this week?

Jul 02 09:06 PM