Cross-currents at work... caution warranted

May 13, 2011 1:33 PM ETSPY, EEM, FXI, UUP, EUO

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First off, I view the entire monetary and financial system as something of a Ponzi scheme. Starting with currency that is debt, and running straight though a global economic model that is based on a premise of infinite growth in a finite world. This won't end well. I'd go a step further and suggest that our materialistic value and belief system is another way in which we're building castles on sand... but I digress. I view that markets as a casino, and frankly, I like gambling. So I rather enjoy the game, and love reading Seeking Alpha and anything that feeds my appetite for knowledge and insight. I prefer technical analysis to fundamental analysis because I find the "behavioral" side of investing more interesting than longer term projections based on numerical analysis. I believe in micro-caps. I believe the market rewards growth above all else, and growth is easiest and most explosive when a company is young and small. As a company matures, its growth inevitably slows. Microcap stocks tend to be extremely volatile so I believe strongly in taking profits on the way up (or exiting quickly if the entry point proves poor). I attempt to buy stocks that are pulling back in the midst of a longer term uptrend. I hold anywhere from hours to years, but usually in the 3-6 month range. I committed every investing cardinal sin between first entering the markets in 1999 and 2002, losing 90% of my money. Since then, I've found an approach that works reasonably well for me. My average return has been about 25% annually since 2003.

Some interesting cross-currents at work with QE2 winding down in the next months. A few warning signs are in place, most notably the U.S. Dollar continues to push higher – something that has almost always coincided with lower equity prices in recent years.

The Dollar is testing a support level that has recently turned into resistance. If it breaks through at this this level, it looks like the Dollar Index could run up a bit more before its next resistance. Also potentially bearish for the U.S. markets is an apparent breakdown in the Emerging Markets. EEM has broken trendline support and may soon test its 200 day moving average.

Perhaps the best “tell” of future prospects within the Emerging arena has been China, which has led the U.S. markets by a few months but pointed directionality over the last few years. China has formed a flag pattern over the last few years, as Chris Kimble pointed out, and is close to testing the bottom bound again.

The good news for U.S. equity markets right now is that the High Yield arena has shown no signs of breaking down. Chris Kimble points out that High Yield has been another good indicator of market directionality, and without a high yield breakdown, it’s unlike the U.S. equity markets would tank.

The S&P is also holding within its trendline bounds for the moment, though it seems to be boxing itself into small and small trendline confines. It has a long term (bearish) rising wedge, but within that, it now has a small flag pattern that could go either way in the short term.

It seems like a sensible time to hold a pretty defensive, neutral position until these cross-currents resolve in one direction or the other.

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