I have been a professional money manager for over two decades and therefore have seen several different environments, everything from market crashes to irrational exuberance. I claim to specialize in being a dual directional portfolio manager. I attempt to profit in any market environment – up or down, by limiting downside risk when positions don’t work and letting profits run when trades go my way. One of my main strengths has been “reading” the markets, through a combination of both technical and fundamental disciplines. However, I feel one of the most important attributes to being a successful portfolio manager is to be pragmatic. In this environment I believe that trait above all else will determine one’s near term fate for profit or loss.
The markets have really been tempting doom as of late, experiencing a 1000 point day “flash crash,” a 14%, thirty day price correction, and several tests of major support which failure would have left the market vulnerable to another significant and potentially quick decline. With that said, many negative factors have been overcome – at least for now! The market no longer is overly bullish or complacent. The high number of stocks trading above their 50 and 200 day moving averages has been alleviated. Important support levels have been tested several times and have withheld those assaults. While economic activity is still slow or slowing, the data is still substantially better than it was 12 – 18 months ago.
For those reasons I am near term neutral on the markets. Understand that neutral does not mean satisfied or unworried. The market has surpassed three important technical levels. The downtrend that started in late April has been pierced to the upside. This downtrend can be seen by drawing a line connecting the highest daily highs on any chart over that time. The overhead resistance line (around 1107 on the S&P) that was in place since May 20th was also breached to the upside. The 200 day moving averages for the major market indices have also been exceeded in recent days.
Investors always ask, “If you are out of the market – how do you know when to get back in?” My answer is always the same – when it stops going down. To which I always get a very stern glare back in my direction. The pattern just described, potentially demonstrates a market that has stopped going down. To cross above a confluence of three vital technical indicators in this close time proximity is a strong reason to take long positions back into the markets. Another bonus is that support is within 7% from this entry point on the S&P 500. This creates a low risk, potentially high reward trade.
Does that guarantee success? Of course not, as nothing is guaranteed in the markets, especially in this tough environment. This is the reason investors should use stop losses – to protect against those situations when the upside breakout doesn’t work out and the markets go against your positions.
So why am I not more bullish if several technical factors indicate a market that has stopped going down? Simply stated, the markets have more negative headlines that can knock it off course than potentially positive news that will drive it higher. Fears of another slowdown in housing, the problems in the Gulf of Mexico, the high unemployment rate, the problems in Europe, the potential housing bubble in China, and the unprecedented amount of global debt are just a few of the reasons to be bearish on the markets. On the flipside, the amount of money being printed and used to trade on the markets, and a willingness to print more money to bail out any troubled institution could be cause for near term bullishness.
We are investing on the long side of the market due to the positive technical developments, but the final huge benefit of being pragmatic is that it allows you the right to change your mind when more information becomes available. I assure you that a day of reckoning for the economy and the stock market is still coming. What can’t be foretold is when that day will arrive. Is it two weeks, two months, or two years away? That is the big unknown, but because it can happen sooner rather than later – I remain neutral on the markets.
The markets have really been tempting doom as of late, experiencing a 1000 point day “flash crash,” a 14%, thirty day price correction, and several tests of major support which failure would have left the market vulnerable to another significant and potentially quick decline. With that said, many negative factors have been overcome – at least for now! The market no longer is overly bullish or complacent. The high number of stocks trading above their 50 and 200 day moving averages has been alleviated. Important support levels have been tested several times and have withheld those assaults. While economic activity is still slow or slowing, the data is still substantially better than it was 12 – 18 months ago.
For those reasons I am near term neutral on the markets. Understand that neutral does not mean satisfied or unworried. The market has surpassed three important technical levels. The downtrend that started in late April has been pierced to the upside. This downtrend can be seen by drawing a line connecting the highest daily highs on any chart over that time. The overhead resistance line (around 1107 on the S&P) that was in place since May 20th was also breached to the upside. The 200 day moving averages for the major market indices have also been exceeded in recent days.
Investors always ask, “If you are out of the market – how do you know when to get back in?” My answer is always the same – when it stops going down. To which I always get a very stern glare back in my direction. The pattern just described, potentially demonstrates a market that has stopped going down. To cross above a confluence of three vital technical indicators in this close time proximity is a strong reason to take long positions back into the markets. Another bonus is that support is within 7% from this entry point on the S&P 500. This creates a low risk, potentially high reward trade.
Does that guarantee success? Of course not, as nothing is guaranteed in the markets, especially in this tough environment. This is the reason investors should use stop losses – to protect against those situations when the upside breakout doesn’t work out and the markets go against your positions.
So why am I not more bullish if several technical factors indicate a market that has stopped going down? Simply stated, the markets have more negative headlines that can knock it off course than potentially positive news that will drive it higher. Fears of another slowdown in housing, the problems in the Gulf of Mexico, the high unemployment rate, the problems in Europe, the potential housing bubble in China, and the unprecedented amount of global debt are just a few of the reasons to be bearish on the markets. On the flipside, the amount of money being printed and used to trade on the markets, and a willingness to print more money to bail out any troubled institution could be cause for near term bullishness.
We are investing on the long side of the market due to the positive technical developments, but the final huge benefit of being pragmatic is that it allows you the right to change your mind when more information becomes available. I assure you that a day of reckoning for the economy and the stock market is still coming. What can’t be foretold is when that day will arrive. Is it two weeks, two months, or two years away? That is the big unknown, but because it can happen sooner rather than later – I remain neutral on the markets.
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