Another dull day yesterday. It could mean something bigger is around the corner, but which way?
The indices barely blinked on Wednesday. Volume was low and we traded in a very tight trading range. The good news was we didn't give back the big gains from Tuesday. That is a good sign but the market has been playing this up and down game for some time now. We are up now. Can we sustain that or are we setting up for weakness? Tough question.
Here we are on the Thursday of options expiration week, typically a strong day. Tomorrow, Friday of expiration week, is typically weaker than normal. We are no longer overbought in the short term although the longer term moving averages are still there, but we aren't oversold either. Today we get another AAII Investor Sentiment Survey to see how bullish or bearish the herd is. A lot to consider.
With this information, the short term investors have to come to some sort of conclusion. Do we stay invested knowing the longer term is looking good and that we can weather any short term downturns storms? Do we sell and try to avoid a pullback but risk missing more gains? More tough questions.
Day traders have three things to worry about. Should they get long (buy stocks), sell or short sell stocks, or get on the sidelines and into cash? We have two, long or cash. Many respectable day traders I follow are doing the cash thing because it is just not clear which way we go. The luxury they have is that they can change their mind any time during the day where we have that day or two delay. Some cash (G fund) may be a reasonable play.
Asian markets and S&P futures are down as I write this (Wednesday night) but because of the historical strength of Thursday's trading during options expiration week, I am thinking we will see some gains before the day is over. Things are shaping up but we have a lot of historical and seasonal data working against us Friday and next week, and we are still at some tough resistance areas in the short term. So, if we are at least even by the deadline today (12:00 noon ET on Thursday) I will make some sort of transfer into the G fund. If we are down more than modestly, I may just stay 100% stocks.
The other question is when to get out of the I fund or more into it. I'm not sure what the dollar is doing exactly. Again it is coming down to the lower end of it's trading channel, but will that hold and the dollar rally? Or will the support fail and we see even more weakness? I don't know but I think the risk/reward play is to get out of the I fund and watch and see from the sidelines. (Remember, a strong dollar is bad for the I fund and a weak dollar is good).
I expect a little pullback BUT a lot of people are talking that way. The more people thinking one way, the more I suspect the other way may be the play. I am just not that bold right now. I plan to stay at least 60% to 75% in stocks no matter what I decide. I'm just too bullish for the longer term to do anything too bearish.
That's all for today. Currently 40% C, 40% S and 20% I fund. See you tomorrow or on the message board.
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Highlights from prior day's comments (see archives on left for full
article):
My indicators and the data and statistics are all over the place. We see reasons to be very bullish, reasons to be very bearish and reasons why the market may stay neutral. The market drops like a rock one day, then rallies strongly the next. If you jumped out of the stock funds out of fear on Monday, you missed Tuesday's rally. Then what? Jump back in? It sure makes making a short term call difficult. I'm going to break it down into three time frames and explain what I am seeing and thinking.
The very short term - The next few days: We are in an options expiration week (June options expire after the close on Friday.) This is typically a stronger than average week, although Fridays of options expiration week are weaker than normal. The June seasonality graph (reposted on the bottom of the page) coincides with the options chart and it basically says a couple more days of positive action this week but possible weakness Friday and next week.
The short term - The next few weeks: The rally in the bond market Tuesday was quite significant. So much so that there is data that shows that after a day like that, the average S&P 500 return 10 days later is well above normal. The average gain is almost 1.5% higher that a typical 10 day period. The downside is that after 120 days, the average return is below normal, but we'll worry about that when we get there.
Two big concerns for the short term. The sentiment indicators are back to being too bullish. Usually a sign of a pullback lurking. The other concern has to do with the OEX index options put/call ratio. Not to get too confusing but options on the OEX (S&P 100) are leaning toward being bearish, it is actually a time to be worried. OEX index options are different than regular equity (stock) options. Stock options are usually played by the smaller, "dumb money" and usually a good contrarian indicator (when they are bullish I get bearish.) OEX index options traders are considered admirable market timers and are not to be used as a contrarian indicators. When they get bearish, I listen. Looking at the 21-day moving average of this OEX put/call ratio, they are almost there (bearish)...
Chart provided courtesy of www.sentimentrader.com
We see that the S&P 500 appears to peak each time the 21-day MA gets over 1.4, and 1.4 could be only days away.
The longer term - Through 2004: Even though we have reason to believe we could see more volatile up and down action over the next several weeks, I am still in the very bullish camp for the longer term even though we have a lot of external factors to consider in the short term such as Iraq's June 30th deadline. We are sure to see violence to continue there as that date approaches. Also, the Democratic Convention is a date I am eying. It is to be held in late July and I believe Kerry's rating should peak and begin to decline after that date. As I have mentioned before, and this isn't a political preference but merely a universal observation, the reason this will help the market is because the market favors a republican president. I'm sure if it has something to do with taxes. The market sure did well when Clinton was in office so I don't know of the validity of this favoritism, but mark my words, as Kerry numbers rise and fall, the market will sway in the opposite direction right up to the election. So I now believe that next surge up could come as late as early August.
I'll leave the following charts here for reference
for a few days...
According to this chart, the 14th trading day in June
may start the next pullback or short term wave of weakness. With
last Friday being an unscheduled holiday, Monday, June 21st would be the
14th trading day in June.
Chart provided courtesy of www.sentimentrader.com
Friday June 18th would have been the 14th trading day in June without the Reagan holiday. Why is that important? Well we are again in an options expiration week which is typically stronger than a normal week. But Friday of options expiration week is the only day that is down on average. Maybe Friday is the day to lighten up. The week following options expiration week is typically weaker than normal. This may be why this next chart coincides with the above chart.
Chart provided courtesy of www.sentimentrader.com
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