Change text size

• Email This Article
• Print This Article
• Subscribe

MARKET ANALYSIS

With a quick and ugly about face by Wall Street, a few investors are likely requesting a Mulligan on the “Sell in May” opportunities no longer afforded. For the three-day period, the NASDAQ Composite ($COMPQ) and S&P500 ($SPX) are off -2.94% to -3.15% on a bit less bull, but in a good sort of way.

From pressing the bullish envelope of both Bollinger Bands and an overly optimistic investor, Wall Street has done a near complete about face as to the meaning of it all. Gone are the days of banking on further liquidity and valuation momentum from private equity-types to continue supporting the market. And in their place, rising yields breaking through key psychological resistance of 5% and a nervous investor that’s quickly realizing, yet again, that the recent rally was no different than other past periods of excess.

Other factors over the past couple of days certainly didn’t help as investors quickly looked to revamp their market outlooks. Comments from Fed Chief Bernanke which emphasized the Fed’s ongoing inflation woes and a weaker-than-thought housing situation rattled investors. A “Triple Sell” signal issued by Morgan Stanley (MS) on Wednesday certainly didn’t help matters. In fact, the investment house is calling for a decline of at least 14% based on its financial models.

Energy woes also conspired against market bulls in a two-pronged attack. First, the July contract tested its one-month highs by rallying 1.15% for the three day period. That action, of course, brings the consumer spending and corporate profits wild card into play and much to the bulls chagrin. Secondly, the influential and heavily-weighted energy complex (XLE, OIH) was chopped down by -3.37 to -4.12% from their respective all-time-highs and only exacerbated the broader indices slide.

Elsewhere, a very mediocre mix of same-store sales also weighed on the market net-net, as consumer spending once again came into question. And finally, bond fund manager Bill Gross of PIMCO sparked a late day sell-off Thursday afternoon. An announcement that the very famous Bond Bull had turned bearish after twenty-five years was enough to keep investors three-day flight-to-safety looking like a very crowded, but still profitable investment ride.    

Market Snapshot

Figure 1: S&P500 (SPY) Daily

Three days into a corrective move and market barometers like the S&P500 that investors didn’t sell during the month of May can now be sold at levels last seen on May 1^st. As that level also marks a corrective move of nearly -3.5% from the benchmark’s very recent and extended top, that’s not such a good decision to be pondering as of Thursday night.

It turns out that recent observations stressing reigning in directional risk have been well rewarded. You needn’t have thoughts like, “Well, heck, we’re only back to May 1^st” either to justify having stayed the course. While it’s true that that’s where a benchmark or two are currently testing bullish nerves and ambitions, elsewhere many more stocks have already bolted past that type of shallow and corrective activity. 

Currently, the extreme short-term conditions are at levels, both on a technical and sentiment basis, which can’t help but be recognized as bounce material. However, the market needn’t bounce. Oversold can always become grossly oversold. Just ask another ‘Gross’ about that. With that being said, my own take is that come Friday morning, I’ll be looking to play a bounce by nibbling, but not chasing or moving fully into bullish positions.

I’m personally more cognizant of the potential other shoe still dropping, than not. Further, playing a “V” or bounce-style long needs to be recognized as being very prone to failure and exited quickly, if proven technically wrong. Look back to March or any other meaningful bottom for that matter. Hopefully, the conclusion reached is that by entering now or in the immediate future: you’re not only first, but you’re also likely to have many other stronger opportunities in the next couple of weeks.

The following factors and anecdotal evidence might be considered relevant in determining a suitable, limited-risk strategy in the coming days and weeks ahead.

MARKET LAB

Bullish Technicals

• Smart / Dumb $ Crossover per sentimentrader.com
• ISE Put-to-Call Ratio most bullish ratio since March 9th
• Short-term VIX percentage thrust 3-Day / 28% entering bearish extremes
• Short-term indicators: TICK, Down Pressure, Breadth
• 3.5% Corrective move S&P500 / 1500 & 50-Day MA testing
• Short-term “Outlier 50-Day / Bollinger” SPY, INTC, MSFT, GS…. 

Bearish Technicals

• Topping patterns / zone resistance confirmed
• ‘extended’ 4 / 20-year bearish cycle convergence, < 10% market correction        
• The ‘Best Six Months’ per Traders Almanac complete [Oct thru April]
• 10-Year note clears 5% and one-year highs / risk-free instrument vs equities
• Dow Theory derailed (trannies, utilities and industrials)
• VIX Longer-term reversion to mean principle > 20% to 25% IV needed for true extreme
• Morgan Stanley’s “Triple Sell” 14% minimum House of Pain market call 6/6
• PIMCO’s Bill Gross turns Bond Bear after 25 years of being bullish on debt instruments

GROWTH STOCK ANALYSIS

In our last report, which seems like an eternity, it was noted that the selections on the Bears Radar had been stingy in their profitability and typically quick to change, as the short delta was still fighting the tape. That’s no longer so, of course. And for a few of those stocks in which the bearish faith was maintained, an overdue technical stumble has occurred. As such, vehicles like the S&P500 (SPY), M&T Bank (MTB) and Disney (DIS) are being removed for graciously pleasing the Ursa Major, but now quite vulnerable to a snapback off their respective lows. Meanwhile, others from this group have also performed in the intended direction, but the bearish weekly influence still affords them the benefit of the doubt, while not being deemed overly extended. 

From the Bulls'' Radar, results were less benevolent directionally. In this category, both Gilead (GILD) and Fastenal (FAST) are being dropped from the watchlist. While the remaining selections from our prior report also saw some declining shareholder value, most are considered in position, more or less, when one considers the surrounding market conditions as of Thursday evening.

Why should we care about bullish propositions still? Well, unless the market is unable to right itself back up and this time things are really, really different i.e. bear market; we have our first corrective action. Ultimately, that could develop into a very playable bottom. Personally, the anticipation is that we’re still in the dagger stage of the move and bearish sentiment is likely too new to look at establishing longs with any aggressiveness. However, should we get a bit more downside, subsequent stabilization and a bearish crowd still roaring and reeling: then we’ll likely find a worthy high reward / low risk situation.  

Finally, the lone selection from the Non-Directional Coilers list, Volt Info Sciences (VOL) made good on its earnings-related breakdown from a lateral congestion pattern. However, depending on the use of either a Strangle or Straddle: exiting pre-report and into the premium juice or waiting to adjust / swap out during today’s move, proved to be the difference between profitability and less desirable results.

RADAR SCREEN

The following optionable stocks look to have a combination of technicals and fundamentals that might warrant further investigation based on a trader’s own methodology and risk acceptance. The list is not a recommendation and is intended for educational purposes only.

The Bulls

Table 1: Bull Watch list
Non-Directional Coilers

Table 2: Basing Watch list

The Bears

Table 3: Bear Watch list
 

Chris Tyler
Staff Writer & Options Strategist
Optionetics.com ~ Your Options Education Site
Visit Chris Tyler’s Forum
 
The information offered here is based upon Christopher Tyler’s observations and strictly intended for educational purposes only, the use of which is the responsibility of the individual. 

• Email This Article
• Print This Article
• Subscribe

Recent Articles by Chris Tyler, Optionetics.com

• July 30, 2010
  Midday Action: July 30
• July 30, 2010
  Hot Shots, July 30: Straddling a Breakout Performance from Within
• July 29, 2010
  Midday Action: July 29
• July 28, 2010
  Growth Stock Swing Option: July 28, 2010
• July 28, 2010
  Midday Action: July 28