Market outlook and thoughts:
Many TraderPulse members have asked me to offer my market outlook and to be very specific.
I usually don't get this specific, generally because I view the market on a day-to-day basis and try hard not to make my positional trade decisions based on the market.
But here goes:
Lets talk technicals:
Dow just broke a 6 months down trendline at 9700 and appears to be ready to make an attempt at the next very significant resistance area around 10,025
I think very major resistance at 10,025 will hold, certainly on the first try.
NAZ is looking much stronger than the Dow.
First, it broke a 1 year down trendline at low 1700s
Second, it broke a 6 months down trendline at 1800
Both of the above trendlines were very impressive.
There are 2 major obstacles before all systems are go for the NAZ (far as charts go)
There is a huge 2 year down trendline at around 2050
and Major resistance line around 2150-2175
A break of the 2050 level would be a very significant chart event in my eyes, as all down trendlines will be neutralized and a major chart buy signal could take place.
This particular level is where I will significantly reduce all many of my short positions.
Right now a market is almost in a perfect up channel and right in the middle.
marketswing.com
Lets talk fundamentals:
Fundamentals are absolutely outrageous right now.
Market PEs are actually higher now then they were in the peak of 2000.
Please keep in mind, just because valuations are very rich, it does not mean they cant get a lot richer in the short term.
In the long term picture, the only thing that matters are valuations.
Who is buying and why are they buying:
Do not make excuses for this rally.
This is not a short covering rally.
This is not option expiration rally.
See it for what it is:
"I might miss this rally"
"The train has left the station rally"
"I am a fund manager and am scare to underperform the indicies rally, so I will buy"
"Don't fight the fed rally"
"Bush and Alan Greenspan will make everything whole again rally"
"Government spending and stimuli rally"
"Earnings are really going to improve rally"
"Rate cuts are going to work rally"
and
"Seasonal rally - NOV to JAN is usually a very favorable time of the year for stocks, year end and January effect"
What do I think will happen?
I don't see the NAZ taking out 2050 and I don't see DOW taking out 10,025
Closer to these levels I will have more shorts with stops if these levels fall.
I don't see all these cuts working the way everyone thinks they will.
All this government spending and all this stimuli will come back to haunt this economy for many years to come.
The government is using a short term solution to combat a serious problem.
US has the lowest savings rate in the world.
Now the government wants the consumer to save the economy by spending even more, therefore saving less and using more credit.
The country is becoming a credit junky.
There will be a large price to pay for this in the future.
I personally feel that there is a glut of technology out there. (especially fiber, which is only 10% utilized)
The law of diminishing returns will neutralize the rate cuts from improving the technology sector.
Technology advancements are now minimal at least when you compare them to price and use. (unlike 1996-200 where there was a huge difference between a 386 and pentium3)
I feel our economy is on suicide alert.
How does this effect my trading:
I don't let my views cloud my mind.
The trend for now is up and will stay that way until its broken.
Every morning I wake up I expect the market to close higher.
This keeps me scared and prevents me from taking on large risk with additional shorts.
I can name 100 companies that I would love to short right now.
But I am not shorting any of them, except on what I call perfect entries.
I am not shorting any NAZ related issues, except an occasional solid reward/risk situation with a reasonably tight stop. (like EBAY, short at 59.05 and stop at 60.45. Small loss and move on)
I am only 51% invested of cash right now, this leaves me lots of wiggle room.
Most of my position don't have a high correlation to the market.
Notice that half way through November my portfolio is plus being all short basically, while the market is rallying everyday.
This is my plan for now and for the near future.
Play defense.
No need to go to war, fight small battles.
Only reason I am at 51% invested right now is because my portfolio is hanging in there.
If I was getting squeezed and losing money this month I would probably reduce to only 20-25% invested or less.
My plan is to survive for now and reap the rewards when the market turns.
I am not interested in huge risk.
I am starting with small positions and adding in larger intervals.
Allocation is your friend and never forget it.
I am a short always. In all markets. (except the month of January)
I just adjust to all situations.
Usually I hedge my short positions with value longs.
Right now I cant find a stock I even like long.
To me the valuations are ridiculous.
The longs have very short memories.
In time they will regain them.
Make sure you are still standing when that happens.
Sincerely
Michail Shadkin |
