Summer-End Stall

MARKET ANALYSIS

The past 5 trading days we have seen almost a perfect flag. Nearly identical ranges and finishes generally means we are setting up for a large move once we break one way or the other. Depending on who is looking at this chart depends on their opinion on direction. Bulls will assume this is a continuation pattern getting ready to move higher and the bears will take this as a sign the market is starting to top out unable to move beyond 1035. In reality, no one knows the future so it is best to wait until it confirms one way or the other.

The McClellan Oscillator is also not really helping us as it is in the middle of its range so risk is equally skewed both ways in the short term. Most Bullish percentages are still at very high levels however oddly enough we can see that the Nasdaq 100 which led the rally has sold off significantly while the S&P 500 has held up.

This could make the S&P the better play to the downside if we do pullback as it would have more to fall. I am personally still skewed bearish at the moment on the S&P. Even though there is generally a bearish tone to the market this time of year I feel like some of numbers we have seen lately could become less rosey. My macro view is we see the end of the real estate season which will slow down the entire ripple effect it lends to all sectors. The stimulus injected into the economy has helped sustain it to this point and I understand it is like they are trying to push start a car where the stimulus gets us through until we actually get going on our own. However, it can only do so much. From my own metrics employment may improve over the short term as more jobs seem to be getting posted even in the finance areas even though still limited. I still think we hit 10% measured unemployment in the long run and don't recover for a while. Eventually the lack of ability to spend will catch up with companies even with their cost cutting measures to help numbers last quarter.

TREASURIES

We have a divergence again in terms of equities and treasuries. I am kicking myself that I did not buy /ZN after it collapsed on friday. It pulled back to an area of support and I missed a decent snap back rally that would have been a very nice gain but since buying /ZN is essentially bearish on stocks I didn't want more risk to the downside. I find it curious /ZN sold off so much if we are planning an extended pullback, however it could still be feasible we get a pullback and people are just starting to demand higher rates. I was looking to buy at 116.035, it is currently 116.305. 270 ticks could have made my month, but oh well that happens. This was a perfect retest of the flag breakout so we should continue higher from here pointing to downside in stocks. Until we get evidence of real inflation rates are likely to stay at the lower end of the range.


FOREX

Most major currencies were unable to make new respective highs and lows on the latest rally attempt, which is another bearish divergence. Even though places like Australia remain relatively strong they will not be immune to another downturn if it comes. Although AUD does remain in its uptrend it could be starting to signal a consolidation or reversal. It could be a good pair trade to go long AUD/USD and Short EUR/USD as the hedge.

COMMODITIES

After testing 75 like I assumed would happen oil was rejected fairly quickly back down and has yet to make any significant rally since. The other materials have also sold off recently as the prospect of no real demand or inflation coming on for some time likely took a bit of wind out of the recent rally. I am still a long term bull on commodities overall but think we could pull back here along with the rest of the market. Many people seem to like gold however I really think another metal would be a better choice because it really has no industrial demand. Sure people may want to own it for an inflation hedge or an end of world type scenario but I'd rather have something that is both physically needed for a use and affected by inflation such as silver or platinum or copper. The soft commodities have somewhat lagged. Corn tested 320 again but did not successfully break back above 330. We could stay in this range for the time being but it may be difficult for it to sustain a sell off in equities and if we see a breach of 320 again it could woosh to 300. I doubt it stays there for long though and I would be a buyer at that level. Again long term how can you argue with a growing population and decreasing land and resources with increasing demand?

OPTIONS

With the indecisiveness of stocks my account has made minimal fluctuations but also minimal progress. Overall I made a 1% gain on the week but that basically came on friday when a majority of my longs and shorts were working nicely. Again, a push is a win but I'd like to be more efficient with my time in market. In my recent article on position sizing, I talked about buying puts on IBM. This is currently one of my short positions and I like the setup a lot. It is rolling off 120 nicely, my OTM puts have suffered a contraction in volatility but my target is 112 with an exit on a close above 120.
Visa is one of my long candidates and the chart looks nice as well. It is nearly at a new 9 month high. If it can take out the previous high we could see some good upside. If it gets over its longer term resistance at the IPO price of 75 things could really take off however I suspect that won't happen until we see a more substantial recovery at the same time. I am targeting 75 in the short term with an exit below 68.

I still have long calls on LVS with a far OTM strike short call hedge. For my other bearish positions I am long SDS and SRS calls. If we get a decent pull back in stocks I wll look to lighten my bearish positions. With 18 days left till expiration I may start looking at good stocks to sell premium on into next week in both directions.

I know I have slacked in my posting lately due to being busy with some other projects and travel but I will be more active again next week once I get back into town. As I write this futures are selling off a decent amount down 6 points. We'll see how Monday shapes up as there isn't a ton of economic data coming out in the US.

Total Return for 2009: 139%