Eventually today's gain will be erased but there could be more upside first...be on guard

I have been stating here for a while that the market has been climbing a wall of worry. I have pointed out many times how it gets no respect, how people keep calling it a bullshit rally, manipulation, fake or whatever. There are still plenty of skeptics but I'm starting to notice some signs of froth. We are starting to see morning strength instead of weakness which is a sign that the emotional money is getting bullish but mind you...only this week have we started to see this. Also and more importantly, the smart money which acts in the last half hour of the day has been bearish this week...again, only for a week has this occurred. Another warning sign is when the ratio of trading volume on the NASDAQ vs. the NYSE spikes which indicates an exuberance for "risky" stocks. This is occurring right now, but it's still not quite at extreme levels.

We also have an unfilled gap after today's action and the post fed hangover tendency of the market. Here's a great chart which shows that there's a very high probability that the gains we have seen today will get wiped out in short order.



However before you bet the farm short, understand that we could very well see some sort of an upside blow off panic buying type move to about S&P 900 or so first before heading down because today's action did not result in mass capitulation from bears given that the market closed under the 875. It did break 880 intraday but only briefly and because we closed at 875 it gave a lot of bag holding bears a bit of relief and hope. It may very well be the case that Mr. Market really turns the screws on the bears until they finally just can't take it anymore and capitulate and after that point head down.

I don't plan on making any trades because I don't see a good risk/reward set up. Perhaps tommorow will offer an opportunity intra day.

Could we get a blow-off type move instead?

Perhaps the senario that I outlined a couple of weeks ago about a break of 880 on the SPX leading to a blow-off type move could be in the works here. Too early to tell yet but it's looking this way. This market has been especially tricky of late and I can tell it has been causing a lot of pain for a lot of traders...

I'm on guard for anything today including a complete reversal of this move.

A very strong start

This is actually not what you want to see if you are bullish because the dumb money acts during the first half hour of the trading day and a gap up open like this eventually gets closed. Today is a fed day and I discovered the fact that 5 out of the last 6 fed days ended up with an average gain of 2.4% which is quite large and therefore must be respected if one intends to fade this rally. After this however, there tends to be a fed day "hangover" and the market gives back all the gains within the next few days. I still think however, there is the potential for this strength to reverse itself. I haven't made any moves yet....

S&P 840 likely

Given the recent market action I believe the market will decline to about the 840 level on the S&P before making any sustainable advance. At that point the market will have worked off its overbought condition sufficiently enough to launch another leg higher if it still has legs. However, I'm open to the idea that if we get the drop I'm expecting and subsequently the market rallies, makes a lower high and turns down, an IT top could be in. This is what occured at the top in May of last year. Somehow I have my doubts it will play out like this but I will let the market do the talking.

As seen by the charts below there is a negative divergence with the MSO technical indicator and the rise of the market in the past couple of weeks. This doesn't necessarily forecast a change in trend but it does indicate that at the very least, a mild correction is immanent which is why I'm targeting 840. In addition to the negative technical divergence, lagging financials and a "smart money" put/call ratio indicator I track confirm the notion of an immanent correction.




If the proper set up is there I will be looking to purchase SPY puts or perhaps I will be a FAZhole for a day and purchase FAZ of the troika of death. I hope I don't become another one of its millions of victims.

I was kicking myself today watching TBT soar after it dropped in the morning. The drop was too quick for me to pull the trigger. Oh well, serves me right for trying to play all of the wiggles...At the last fed meeting Bernanke torpedoed bond yields with his announcement of Quantitative Easing. This time I doubt any mention of it will result in anything but a knee jerk reaction.

Consumer confidence surges past expectations.....but is this priced in already?

No surpise there for me. Another "greenshoot" but given the market's big run up these past several weeks I think this may be discounted to a large degree already and we may not see much upside today especially with the banks lagging...we may even end up down. However, I have no strong inclination one way or the other.

There have only been three other times we've seen the Consumer Confidence index drop to at least a three-year low, then jump at least 10 points the next month. Those were April 1974, February 1975 and April 2003. The first one was a dud, but the last two both led to one-year gains of +20% in the S&P 500.

Again, yet another similarity to the March 2003 rally...

To balance out my bullish views as of late, I'm going to examine the bear case later on today. It's important to be aware of the arguments for both sides and not be biased.

Important "Stress Test" for market comming up here

Just tonight news was leaked from regulators (according to WSJ) that BAC and C will need to raise capital as per stress test results. This along with increased spreading of swine flu has tanked the futures by about 1.3%. It is really a suprise that these 2 banks (especially C) will need to raise more capitial? I don't think it is.... but as of now the futures are deep in the red, so let's see how this market can handle bad news comming off an overbought condition partially worked off thus far. If this rally is still in tact, then it should not breach 825 on the S&P. That would be a maximum downside target for any "pullback" that would still, in my opinion, keep this rally in tact. I don't think it gets that's deep but I'm preparing myself for anything. It also goes to show you that holding positions overnight can be dangerous due to after hours headline risk. I might get a chance to reload on the VIX puts I sold last week as well as the TBT calls I sold if I see action that I like.

Further comments about Swine Flu and Markets

First off, I wasn't accurate about what I said regarding the outbreak of SARS and the performance of the markets. The first reported case of SARS occured in November 2002 and you can see by the chart below how the market fared from the beginning through to the end of the SARS outbreak.




From what I recalled from memory, the SARS outbreak was a 2003 phenomenon...it just goes to show that you should never believe a word I say. Did SARS cause the market to decline or was it coincidental? I strongly feel it’s the latter. I doubt SARS was even significant enough for the market to acknowledge and even if it was, these sorts of external shocks will not have a lasting effect on financial markets unless the financial consequences are both severe and prolonged and the market tends to do a good job dicounting this right away. Even events such as a presidential assassination or a terrorist attack will do little to derail the ongoing trend that was in place aside from potentially sharp but short term weakness that will be recuperated fairly quickly. The Kennedy assassination for example occured during a strong bull market and it caused the Dow to drop about 3%. This was then quickly recovered within a week as the markets went on to soar to new highs in the months ahead.

911 was an exception to this rule because a) it was so unthinkable for something like this to have occurred in the US and b) the market was in the midst of a severe bear market and this event simply accelerated the downtrend already in place in September. Had the market been in bull mode, the damage would have been less severe I'm sure. Keep in mind that 3 months later, not only did the market recoup all the severe losses that 911 inflicted but it also added gains and this was in the midst of a severe bear market that had yet to have seen its final low. Thus, I'm convinced that had 911 not occurred, the market would have made a bottom sometime in Sept/Oct and staged a big rally after that point….but I digress.

Let’s face it though…. outbreaks such as the Swine Flu are not bullish events to say the least. The "alarm level" as it is called, has just been raised to 4 one step below pandemic level which would label the outbreak as quite serious given there is currently no vaccine for the virus. Therefore, given the fragility of the economy something like this is not a welcomed event. But if the prospects for an economic recovery are real and the market smells an immanent recovery, I’m sure the swine flu will be ignored unless it becomes so serious that it makes everyone want to wear a mask when leaving the house.

Regarding the short term…..I think we will see some more weakness in the market this week before any serious strength. SPX 840-845 may very well be reached. I don't know if this happens tomorrow or perhaps Wednesday...we'll see. I'm taking things 1 day at a time.

I also forgot to mention that I dumped my TBT calls today for a decent gain of 25%. I intend to buy calls again with the proceeds but at a higher strike on a dip. This is a way of pyramiding into a position.