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Healthy Consolidation or the Start of a Market Selloff?

|Includes: ProShares UltraShort S&P 500 ETF (SDS), V

If you look solely at the markets through technical analysis, you can make a pretty solid argument that we are only seeing healthy consolidation before a further move north.  The low volume plus relatively short trading range, over the past few days, helps make a compelling argument.  The only negative is that we couldn’t stay above the 200-day moving average. Since we saw a significant run-up in the markets, it’s not much of a concern as the trading range was fairly tight.

However, when you add in the recent and upcoming economic news, the technical analysis does not seem so bright.  Positive earnings are less of an impact now as most of the big names have already reported.  Visa (NYSE:V) reported solid earnings tonight and hopefully that can help start the bulls off strong tomorrow.  The company reported EPS of $.97, beating estimates of $.93.  V also beat revenue estimates of $1.97 billion with $2.03 billion being reported.  V is also guiding greater than 20% EPS growth for the full year 2011.  Not bad at all for a sputtering economy.

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Will this good news be focused on tomorrow?  Unemployment claims come out early and they are not expected to be favorable economic news.  If for some reason we can see any unexpected upside in unemployment claims, we should have a bullish run.  The unexpected is what moves the markets the most and any unexpected good news should send the bears covering and the bulls running north.  I just can’t seem to be optimistic about these unemployment figures and I feel the negative news will overrule the healthy consolidation we have seen.

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I’ve reduced my longs today and hedged in some shorts, just in case.  I went long ProShares UltraShort S&P 500 ETF (NYSEARCA:SDS) as a hedge against my longs.  Keep in mind that going long an ETF like SDS is still shorting. SDS makes money when the S&P 500 goes down, not up.  If the economic news is the focus tomorrow, I will look to press my shorts while pulling my longs off the table quickly.  All I can be sure about is that we are entering a time of slow economic growth.  We don’t have much reason to believe we will have any worthwhile positive macroeconomic news to focus on anytime soon.  This is why I’m preparing for the downside right now but not pulling my longs off the table until it can be verified.  I prefer not to predict but rather prepare and react quickly.

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As always, do your own homework to see if you agree.  Have a good night and I’ll see you in the morning.  Good luck out there.

Mike





Disclosure: Long SDS but positions may change at any time