Friday, July 9, 2010

TF Daily Swing system takes short - ES adds short contracts and comments

Market feels like it has been in full blown bounce mode prior to earnings season. Perhaps shorts profit taking or being squeezed prior to earnings season is contributing to the rise. However, I would like to point out that internals continue to be terrible. People have been selling leveraged risk all the way up on this bounce - and that is a really bad omen. You can see that in the reDeleverage analysis of SPY and BGU below. The leveraged BGU (gray bars) is selling at a discount to the cash SPY index and the trend has been increasing. This version of the analysis is a longer term view than the normal version that I generally show. 

Apparently, Jon Paulson (Steve Cohen etc...among others) are long everything that can be found - I am betting that that decision is based more on the same kind of gut move that got him into all those abacus CDS shorts than fundamentals or sound judgement (though that former idea had a fundamentals basis and required gut not to mention help from Goldman Tax and friends)...can't help but wonder about it this time. What happens to the market when a few over leveraged 30 billion firms are wrong?

In any case, the subject of sentiment is an integrally related issue and the above demonstrates that sentiment is still bullish. Theory says that the market is not bullish enough for a big selloff based on a bullish percent of 18% or so. I think there is reason to believe that we have not really bounced and have not reached enough of a bearish extreme appropriate for a substantial rally given overall market conditions.

I would like to point out a few things: 
  • The above comments regarding long positioned institutions/HF's demonstrates that we have probably not gotten bearish enough to rally. Nor have we reached extreme bearishness either...something you would have expected to see with nasty volatility like has occurred. In addition, after the volatility that has occurred in market since may - to the point of panic - the market has become virtually untradable for most participants. I know of a few funds that do not have the choice to trade anymore due to all of the insanity. So, I think we have been too complacent to put in a bounce of significance. 
  • In addition, the concept of A-B-C down does not fit well on the weekly chart of the SPX. It does not measure well without a new low and a new low will most likely setup a larger down move not a C. 
  • Overall, very interesting action on very low volume with nearly every leveraged ETF risk trade being sold at a discount to cash in every market I have checked. 
  • In addition, we still have big relative strength discrepancies in major markets/sectors that should be showing strength right now...and distributive internals.
  • If the market were to attempt to rally further, there is quite a lot of "50 day MA" resistance above nearly every one. 
I think that its important to consider that the market has just not gotten bearish enough. And its at moments like these that its easy to miss big trades or get caught wrong footed.  Just some food for thought.

One other point, Monday's have been bullish and responsible for over 80% of the entire points gained since March 2009...perhaps just to fool everyone the market magicians will start bullish Friday's and Monday Madness. Start watching the historical Monday's.
I am doing a substantial new release this weekend of all the RVS and HLA systems. The last trade is slightly different due to the changes but essentially the same performance stats. TF System shorts the close as expected and ES System adds.
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