The Big Wave Trading Portfolio remains under a weak BUY signal, following a week of constructive price action in the overall market. We continue to keep positions relatively small as volume continues to be completely absent in the stock market right now. Traders are still on vacation and there has not been a single what we deem "perfect" or "near perfect" signal since the BUY signal has been triggered. We will continue to operate on a small level until volume returns to above average daily or weekly levels in the overall market or a strong "perfect or near perfect" signal is generated.
As for our opinions on the future direction of the market. We do not have any. However, in analyzing the current situation we find similar parallels to the price action in the summer of 2000. Obviously, this time it is much different as it is not coming from a post-bubble pop. However, as someone that follows history, this must be taken into consideration. A low volume rally is always suspect to heavier volume selling and with another week of August still left it is possible that the low volume rally will continue until Labor Day.
If that is the case, that is when/where it then gets interesting. Will wall street come back post-Labor Day and see the gains on small volume and begin dumping shares? Or will wall street come back post-Labor Day, see the melt up on low volume, then see the 5-year high of the NYSE short interest ratio at 19.92 (MarketSmith numbers), and then squeeze the shorts to death? There is not one person out there that can answer that question. We must let price be our guide.
If volume was heavier on this leg up and NYSE short interest was increasing, then I would lean to a powerful possible rally coming into election season. However, with the volume being so low, a pullback can easily materialize here. We will continue to go with the flow of price and use options to allow us to generate outsized returns that was once attainable via stock purchases alone with margin before 2011.
The one extremely bright spot for us lately has been the earnings winners. Stocks gapping up on volume following earnings announcements have done brilliantly and those around in the morning taking the advice given from BWT traders have benefited greatly. Sadly, earning season is wrapping up and that means that we will have to wait 3 more months for these explosive moves that have given us an extremely high reward/risk right/wrong gain/pain ratio to come around again.
There are a lot of so-called bulls out there in the II and AAII survey. There are a lot of shorts out there according to the NYSE short interest ratio. Which one is right? It doesn't matter. Right now, all that matters is price. Follow the price. It is the only thing that doesn't lie.
Top Current Holdings - Percent Return - Date of Signal
AVD long - 97% - 1/10/12
BVSN short - 82% - 3/19/12
CLGX long - 39% - 6/19/12
STX long - 37% - 6/29/12
PRXI short - 36% - 3/30/12
PHMD short - 31% - 5/11/12
VRNM short - 30% - 4/10/12
MAGS short - 27% - 4/18/12
Additional disclosure: I am short PRXI, PHMD, VRNM, MAGS, BVSN