Put your money where your mouth is

Initiated three short positions this morning. Looking at the big picture, it appears that technology and consumer sectors appear weakest. I looked at scores of charts, starting with the point and figure (P&F) charts to look for sell signals - then transitioning to the yearly charts to identify medium term trends and tops.

This was my list of worthwhile short ideas:

GD, EMN, STX, EBAY, GOOG, RIMM, JNPR, GSPMS, RL, INTC, GLW, VFC, NOK, VOD, PTNR, AAPL, DELL, PMTC, T, AVP, KMB, AMZN, NSIT, COST, LOW.

I then looked at analyst research to identify the weakest fundamentals of the group, and narrowed to STX, JNPR, PMTC, AMZN.

All four looked good, but the bid/ask spread wasn't as attractive for PMTC. I bought at the money June puts on STX, JNPR, and AMZN, with equal position sizing. Stops are based on short term trend reversal, expected holding term is to expiration. I'll definitely sell early if positions fall to former support levels (around a 50% drop!)...

Inflection Point

The recent rally has surprised most investors. The bears were caught off guard - just as everything seemed to be going their way... The retail investors weren't ready - most just finished selling at the bottom and were too stung to jump back in. Many in the finance industry weren't expecting what we've seen - how many "experts" have you seen wringing their hands lately wondering whether it's time to get back in?

My thought is that if you're not already in, it wouldn't hurt to watch and wait. The aggressive, fast move up off the bottom is done and past. Now, we're up against several big technical reasons for the indexes to pause:

• 200 day moving average
• Matching the most recent intermediate top (established in January 09)
• The 38% fib. retracement line from the Aug. 08 rally just before the "big plunge"

Here's my thoughts, graphically:


I'm currently "all in" - so I'll be watching for reasons to sell to protect profits.

Warning - Investor Running Yellow Lights

Following a systematic approach to investing is crucial. Much like my day job of flying airplanes, successful investing relies on instruments rather than "seat of the pants" instinct. I highlighted recently that my primary indicator of market direction and risk, the NYSE bullish percent, had moved onto defense. In that same post, I stated that I thought a move back up off of support was expected - and that the bullish percents might reverse back up to offense as a result of that move. Sure enough, the market moved back up from support...

No, this isn't a bullish bias on my part. Instead, it's the application of technical analysis that tells me what the market is LIKELY to do. What do we do from here?

There's two factors at play:
1) The market is on defense as per the bullish percents discussed above. This tells me to sell at market resistance points in anticipation of oversupply driving prices lower.
2) My secondary market indicator, cumulative market breadth, came close to confirming the bullish percent's defensive status - but then reversed back up. Note that bullish percents tend to react more slowly.

This leaves me with a yellow light at the intersection, and I chose to accelerate. This has nothing to do with "helicopter Ben Bernanke" lowering interest rates on Weds. Rather, my supply and demand indicators tell me that there are still more buyers than sellers. I am more interested in making profit than I am protecting against minor losses, and in this case I think chart analysis puts the reward/risk ratio in my favor.

Here's what I'm seeing in the market breadth indicators:
Looks like the bullish percents have stopped the bleeding:

So, I'm still concentrated on mid to small caps in the Wilshire 4500 and in the international stocks of the EAFE. Currently the internationals are strongest by far, thanks to the dollar's freefall:

If it gets any worse, we'll have to rename our currency the US Lira.


Thanks for reading!


- Divot