Cautious but not negative

The market acted the way it should on Friday, trapping the late bulls. Even though I am cautious I am not negative in the long run on the markets. The market is in correction mode. Where it goes from there , I will play week by week. Corrections in bull markets are sharp and vicious shaking out most late bulls and offering a mirage to short sellers and bears. It is too early to say the rally is over.

As a practical matter, it makes greater sense to respond to known market conditions,like breakouts, relative strength, earnings, momentum etc. In that thinking mode it allows allow you to adjust our stance as conditions change. Conversely, if you position yourselves based upon a macro prediction about the future, you are stuck with defending that prediction until it comes true or sticking with it until you lose enough that you are forced to capitulate.

Market action during the period from May 2006 to the present serves as a prime example of how the hypothesis based investor miss good profit opportunities. During the decline from the May top it was broadly accepted that the bull market top was finally in place and that a major decline was beginning. The rally out of the summer lows was dismissed initially as a short-term technical bounce in the context of a longer-term decline. The bears held fast. They became vociferous. As prices approached the level of the May top, they hoped that a bearish double top was forming. The bears stuck to their hypothesis.

Now the last couple of weeks of rally left the bears with little on which to hang their hats. It is easy to tell apprenticed investor to trade what you see and not what you think, but hard to practice for the gurus themselves.

There are number of negative things in the news cycle for the market to keep climbing wall of worry. The negative or just barely positive GDP number is what is making bears excited. But the market is forward looking mechanism, so it might have discounted that and may be looking many quarters ahead.

GDP, housing, wage growth, etc. might get macro analyst all excited but as a trader you can not trade based on it. As a trader when you look at a piece of data your first question should be what is the trade in this. Does it indicate long or short or neutral trade. Next set of questions should be has the market discounted this news or is surprised by it.

The earnings continue to show a good picture and many of the stocks which had earning acceleration and earning surprise have a long way to go. Overall market action may dampen their rallies for sometime but with a good catalyst, they will resume their upward climb.


walter said...

you got any reason/hunch why or how they could have messed up that GDP number so bad?

Pradeep Bonde said...

Just statistical fluke. For conspiracy theories visit the top 10 blogs. The market is down not because of it, but because it had rallied without correction. In fact it might bounce back hardto teach over eager bears a lesson.

walter said...

you may be right - anything can happen...

how come no bias against over eager bulls?

Pradeep Bonde said...

"how come no bias against over eager bulls?"

That it did on Friday.

walter said...

i charted the bearish stocks... regarding topping and TL analysis, i like:


walter said...

pre-10AM green disappeared fast...

will be interesting day...

quick question: in your opinion, are equity markets every deliberately manipulated, like in the case of enron manipulating the California energy market?...


disclaimer, i am a news/politics junkie, progressive/leftist

walter said...

When do you think BEA will actually correct the GDP figure?

Pradeep Bonde said...

I don't know. Market moves on its own agenda.

Unknown said...


Just curious on your thoughts for ICUI for a short. Short interest is already quite high.

Pradeep Bonde said...

ICUI has 13 milion float, so shorting it might be high risk proposition. Idealy one should find a stock which has moved considerable in a year or two, atleast 100% plus , it should have 100 million plus float, should have catalyst. Very few stocks meet that criteria but then when they move on short side, they realy move. Why because they were previously mutual fund and other investors favorite, when they sour on these stock, the climb down is smooth and fast.
e.g.g JOYG, CHS, AMD, SNDK, etc

Pradeep Bonde said...

Look at this list, see if you find anything interesting in it. Some might be setting up for short entry in this. These meet the criteria of 100% plus yearly growth and float of 100 million plus.

ADM,Archer Daniels Midland
AEOS,American Eagle Outfitter
AKAM,Akamai Technologies Inc
AMLN,Amylin Pharmaceuticals
CELG,Celgene Corp
LVS,Las Vegas Sands
MDR,Mcdermott Internat Inc
NUE,Nucor Corp
NYX,NYSE Group Inc
PCU,Southern Copper Corp
WFR,Memc Electronic Material
X,US Steel Corp

walter said...


I just did a quick chart of ICUI - the chart is kind of mess - by that I mean I can draw trendlines and support and resistance lines in all different directions to try and get an idea of where it might go next... I also agree with Pradeeps low float sentiment, unless you can catch a low floater on the top after explosive growth (like ANTP last year) it can be tough and painful to trade...

From Pradeep's list above, I am already short LVS and am considering X... not familiar with the rest.

Unknown said...

Thanks for the tips gentlemen. I'm taking a look at both of your lists.