Can we make it #10 in a row? In case you aren't familiar with the potential 'ten-peat', we are referring to the consecutive week roll the market is currently on! Right now, we aren't going to 'high 5' or cheer on the kind of move we've had up to this point. We have been very adamant on the kind of strategy and premise we are using to trade the past weeks and look to carry it forward.
What we care about the most right now, is that if we can continue to go higher, but necessarily this week. A high percentage of Pensions, Fund managers, even retail investors remain long cash. Since this 9-week ran began, retail investors have withdrawn 10 billion and stuffed almost $40bln into corp. bond funds, most Pensions have been consulted to the same and allocate into corp. bonds and not to allocate into equity on an uncertain equity outlook since start of 2009. This why we favor a V recovery now close to pre-Lehman levels, get the pullback and let the above come into equities. Basically, this run has left the majority flat footed, even those in the market every day are caught flat-footed at times, disbelieving what they have been seeing!.
In actuality, whether the upcoming pullback/correction occurs at what level isn't that big of a deal to us. It's going to happen one day, sooner or later as we are in very short term overbought levels. What we really care about is if we can continue to have upside momentum AFTER the upcoming pullback. A bull market is not really marked by the number of points it has tacked on, rather, it's marked by the number of days that the market's in bull mode. If we believe this market will continue to perform to the upside at least till the next earning period, then the upcoming correction should be bought aggressively. This is, what we are trying to focus on in our current trading strategy, which includes scaling into earning stocks slowly for SPX 1000-1100. Looking ahead. Yes, stocks have had some incredible gains last few weeks and it's inevitable that we'd see some pullback, however minor it might be. We are currently at SPX 929 and the next logical area of resistance should be around SPX 945, which is not that far off. If we manage to break out of that major resistance, which was the top back in Jan. of this year, we can very well give it a run to SPX 1000-1100. If that ever happens, then this may be one of the most talked about run-ups in the longest time.
As we move higher, the risk of entering long positions are increasing at the same time. Even though the market sentiment and trading environment is much more optimistic than before and many stocks are still trading at a very compelling value, we still can't ignore the fact we are in the recession and a full recovery in the economy still needs months of data to confirm. We may have had some early signs of a bottom, which is good, but it doesn't mean that we should go reckless in chasing stuff. This is why we are very adamant on sticking to earning plays. Keep in mind, the last three months may be the toughest quarter some of the companies had to face in the history of their existence. If companies are showing some good number/growth/profit margin etc., we have to give them full credit. Basically the thinking is this, if the companies can report some decent stuff during a very harsh economic time, then they should greatly benefit when the economy does turn better.
Last week, we had some dramatic action from the financial sector. It's a result of the conclusion of the government's "stress test"! It's pretty obvious that most financial institutions were greeted with flying colours by investors. This is definitely great news. We all knew that "Confidence" is everything in regards to the financial system. If these companies can manage to raise capital from private sector with no trouble at all, we have to draw a reasonable conclusion that the worst of "financial crisis" is well behind us. What matters now among the financial institutions are the future earning power. Some of our favourite names like GS, JPM, WFC, PNC... are still tradable/investable, but we'd much prefer buying them on our own terms, not on a day when every long hedgefund in the world wants a piece of the action.
What is so good about this market right now is the supply of trading opportunities/plays that are on our list. A couple of months ago, we probably don't want to trade anything other than ETFs. Right now, we have many many individual plays/sectors that can be traded with a bull setup. We are just glad that we are running with many options on a daily basis.
The upcoming week is filled with some retail data that will further demonstrate the confidence of consumers. We also have many smaller companies to report which may give us a surprise or two based on the recent trend.
Bottom line, we aren't worried/ scared of the upcoming pullback/correction and we'd view it as a good opportunity to go long heading into the summer months.