By Thomas H. Kee Jr.
There are a few more expected positive catalysts for this market in the coming days, but our midterm technicals are lining up to suggest that November will be a great month for trading the market. The one-sided move higher we have seen recently will likely subside soon, but liquidity is not likely to dry up, so although there are clear reasons to expect a pullback, we must also moderate our expectations.
Our longer term technicals show us that both the Nasdaq and the Russell are breaking out beyond longer term resistance levels, and although the S&P is only flirting with a breakout that is enough for us to understand that literally anything can happen. This is not usually what investors want to hear, but the liquidity-driven market that we are in today ignores fundamentals, we know that will change soon, but if the FOMC continues to infuse capital into the system asset prices will also most probably benefit.
With that said, this type of market environment can be great for traders. In fact, the next tier of our technical analysis, our midterm channels, suggests that very attractive trading conditions lie ahead for the remainder of 2013. This does not imply more upside, but it does suggest volatility, exactly what traders crave.
First, there are a few very important takeaways to understand. Margin levels have recently hit all time highs, and that means people are taking out loans to buy stocks. This is usually a contrarian indicator, and it usually is followed by overbought market conditions, but as of Friday, October 25, 2013 the market was not overbought according to our Sentiment Table.
Also, and equally as contrarian sometimes, short interest by Hedge Funds was officially at a YTD high recently, and although that data is often delayed, and we never really know what is happening in real time based on this data, it is interesting that Hedge Funds have had a short bias while the general public has been leveraging their portfolios to buy more.
When combined, this information tells us the market is currently being bought by the little guy. Clearly institutional investors who may have pulled out of the higher beta names like LinkedIn (LNKD), Groupon (GRPN), and Facebook (FB) recently have seemingly already flocked to Google (GOOG), but the little guy may not be done.
In fact our technical analysis tells us that the Market has a little higher to go before it experiences a 5-8% decline in November. With Apple (AAPL) slated to release earnings on Monday and the FOMC rate decision on Wednesday, there is probably just enough expected good news to keep the market from falling over the next few days, but if the trading patterns line up according to our current combined midterm analysis we expect the market to conduct its own tapering thereafter.
Accordingly, we would prepare to short aggressively soon using short based market ETFs. Using short-based ETFs allows this to be done in IRAs too, and that should benefit retirement accounts as we go through the next month's market cycle. If the pullback comes as expected there may be every reason to buy the market on the heels of the dip as well, again producing an exceptional opportunity for traders.
Given the channels that exist right now, using 2x ETFs the current channels could be set up to return about 30% to investors who adhere. Find a list of the Market Based ETFs below.
Market based ETFs:
· S&P 500
Disclosure: Important Disclosure: Stock Traders Daily, Thomas Kee, and/or the investment portfolios managed by Thomas Kee may own any of the above ETFs at any time, and the same may be sold at any time, without notice, based on the corresponding market channels that exist. I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: By Thomas H. Kee Jr. for Stock Traders Daily and neither receives compensation from the publicly traded companies listed herein for writing this article.