Back to Important Inflection Point for the S & P 500

by: TraderMark

Once again the transition from fear to greed is incredible in this market - a week ago Monday the financial world was on the edge of the abyss, Bear done - Lehman, Merrill looking as next two to go - the S&P made repeated attempts to break 1270 (successfully) yet did not follow any technical rules and magically held 1260 repeatedly during the day. Then the dawn of a new 6 trading sessions later we are 100 S&P points higher with the Federal Reserve backstopping the system. Just like that.

I am open to any directional move because from here on out the Kool Aid theory can be "no matter what bad news is out today, that is backwards looking, and in 6 months everything will be fine". That is a powerful argument because it can be used forever and there is no way to dispute it. Frankly the bulls can shoot down any bad economic report for the next 2 years with this "reasoning". Time is flying - we already approach the April earnings season which means pre warnings should be coming soon. How the market reacts to those warnings will be interesting.

As I've been saying, we could have a "double dip" slowdown (recession, whatever) with weakness late in 2007 through "now" and then some artificial uptick due to government handouts in Q3 2008, and this can be grasped as a reason to rally. While that is suspect thinking and I think the consumer will still be weak on the other end - what the herd thinks is all that is important. As long as the herd believes everything will be fine in 6 months, stocks will go up. Even when you get to that point you are proven wrong.

Case in point, September/October 2007, the market rallied tremendously off the first Fed discount cut since the financial issues were just a matter of a 1x write off and the "Fed was on our side". Did it make sense? Zilch. Did it prove true? No. But the market still rallied 1500 Dow points. So as long as the Kool Aid is running you must respect it, even if its intellectually a farce. Hence why I am open for a huge rally from here or a huge pullback. Or sideways action. Last, as I keep saying, inflation inflated every asset. Including stocks. So simple liquidity thrown into the system can help to buffer this market. (at a cost to Main Street but who cares about them anyhow)

I am back to using technicals because at this point fundamentals are useless. At this point we can go either way, as has been the case at multiple points in the past - we've now rallied from an oversold condition right back to the 50 day moving average (from below). We continue to make a series of lower highs dating back to October 2007. We are now at another one. So it's an important inflection point where we either break through (and get bullish) or fall back and keep repeating the same pattern we've been in for months.

A lot of individual stocks I own are in the same exact condition. I am treating both the indexes and the stocks the same way. Assuming a failure here. And prepared to reverse course if we do not have a failure. For individual stocks, that means to lighten up as we approach their individual resistance, but be willing to buy (higher) if this resistance is broken and we move upward.

For the indexes that means to buy short exposure as we approach this resistance (as we are now), but willing to sell it off if the resistance is broken and we move upward. Same pattern I've been utilizing since October save for 1 week in January when it cost me to not stay in that disciplined approach. Eventually this pattern will fail (we'll make a new high) and I'll have to reverse course... but so far it's been relatively predictable. I'll be looking for action north of S&P 1390-1395+ for that to be confirmed for me.