STOCKS:
The European debt contagion remains front and center. Spanish and Italian short-and-long term bond yields have moderated recently given the ECB looks to step in to buy’em. This shall support stocks in the short-term, but won’t solve the overriding debt and fiscal problems...kicking the can down the road so to speak. So enjoy it while it lasts; after the euphoria will come the days of reckoning. How long? Good question.
STRATEGY: The S&P 500 remains above long-term support at the 160- wma at 1215; which delineates bull/bear markets. However, the 200-dma support level at 1334 remains the bulls “Maginot Line,” while overhead resistance at 1340-to-1360 was extended above and now becomes support. This, coupled with the recent S&P 500 bullish weekly key reversal higher has suggested the 1450-to-1500 zone would be tested; but gosh darn it...this rally is one of the “weirdest” we’ve seen, and this obviously causes us some degree of trepidation. Melt-up or melt-down?
THE AUGUST DOLDRUMS ARE ONCE AGAIN UPON US as the major bourses around the world are moving in very narrow ranges this morning. And, there is no rhyme of reason for the movements we see; although there are a number of press reports out regarding the ECB bond purchases. One note states that the ECB will use a “target rate” on European bounds to become a buyer – ostensibly somewhere in the 5.0% range we would think if indeed this were going to be the case. Anything higher would simply just be too much to bear. Too, we find Merkel warming to the ECB plan to do so; while her Bundestag remains opposed to the idea of buying bonds on the secondary market. In other words, there is confusion coming out of Europe this morning…and it is breeding contempt.
And it is from just such contempt that we are likely to see volumes dry up even further in the US from last week’s slow option expiration week volume figures. What we will make out of this the rally is predicated first and foremost on a withdrawal of selling pressure; and it is not a demand led rally that we all consider necessary for a rally to be “strong and impressive.” We’ll state this rally is impressive in its ability to climb the “wall or worry,” but we remain concerned about the internals and a host of other technical indicators. Finally, it’s important in our mind that our models are now at overbought levels – urging caution, for if they turn lower – then the probabilities will have changed from that of a rally to that of a decline.
TRADING STRATEGY: We’ve recently rearranged our portfolio by exiting our broader market long position in the Russell 2000, while adding a long position in the precious metals area via Goldcorp (GG). The broader market is into major overhead resistance, while gold shares are forming bottoms and breaking out over intermediate-term resistance moving averages. Today, we’ll move once again to trade, but this time to exit our long position in Nabors Industries (NBR) as our gains are rather good; and it is showing signs of supply around its 250-day moving average at $16.63. If we were to exit another long position given a market downturn, then US Steel would be the next portfolio member to be exited.
Outside of this, we like the bottoming action in the coal stocks (JRCC, ACI, BTU), and we like that bottoming action in the gold shares (NEM,GG). Hence, we’ll consider these “special situations” for the time being, and worthy of longer holding time frames.
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