Cautionary Stance Building...

The lack of a sustained rally over the past week of trading has forced my defensive awareness to be on the rise given my overall long bias going forward. There is no need to be fearful yet, but if you are currently long like I am, you must consider what to do if the market continues lower to begin this week. There is still support from the 6/16 low and from the lows of March that will provide some potential areas for longs to step in and buy. However, any move below 1255 will trigger some hedge plays for me (i.e. you could consider buying the US dollar or US treasuries to hedge any long positions). Another approach would be to exit some long positions if the underlying support breaks down. This would be insurance against a precipitous fall. If the selling turns out to be short lived, and the market rebounds after a pierce below the 6/16 and/or the March lows, then you can always get back into your long positions. Whatever your strategy, you have to plan for a potential further decline.

I continue to expect that a rally is coming, but the odds have been reduced a bit now after the previous two rally attempts have been rejected. The odds that the market will now make a lower low have likewise increased.

Its a tricky situation and one must exude caution. History shows that large run-ups in the prices of energy and food are followed by major slow downs in the economy which also means lower stock and commodity prices. I suspect that the current correction is only a precursor to the bigger correction which will be down the road. While I do expect another run higher before this happens, I have to now be ready for the alternative, a continuation down.

Lets see how the week begins...

Fear in the Atmosphere Gives Way by the End of the Day

The early morning sell-off in equities today struck some fear into the minds of a lot of bulls. Even so, The ES couldn't trade down to its Monday lows.

The news that Greece agreed to a set of austerity measures provided the catalyst for the late day rally.

Based on the action, it looks like this latest reversal might have the momentum to officially push the market into its next leg up. I expect the S&P 500 to be heading back above 1300 in the next day or two. If you were carrying a long position without substantial conviction behind your trade, you probably got shaken out today.

I remain biased to the long side. It may be a choppy summer, but I expect new highs on the S&P 500 this year.

Watch FOMC Press Conference with Ben Bernanke Live Here 6/22/11

Click here for the latest FOMC Announcement post.



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The FOMC Announcement will be at 12:30 pm EST today and will be followed by the 2nd ever FOMC press briefing with Ben Bernanke at 2:15 pm EST where he will discuss the FOMC's latest quarterly economic projections. The purpose of the briefings is to provide additional context for the FOMC's policy decisions and to allow for Q&A with the press. According to the Fed, the "introduction of regular press briefings is intended to further enhance the clarity and timeliness of the Federal Reserve's monetary policy communication."

I don't expect any significant information to be revealed. The fact that the economy is in a "soft spot" (or some other euphemism) will be acknowledged, but ultimately, as was said in the last Fed meeting, easy monetary policy will continue until there is evidence that inflation has truly become a problem. The market is already down significantly since early May. There may be some brief volatility this afternoon, but I expect the rally that began yesterday to continue in the days that follow.

Check back here at 2:15 pm EST to watch the Press Conference live.

Market Set to Rally...

The past week of price action has been typical of a shakeout. Fear has been prevalent, the AAII Sentiment Survey showed the lowest number of bulls since August of last year. The market is down more than 7% since the highs in early May. However, as the market continues to threaten to sell-off further, buyers have continued to step in over the past week to prevent a continued slide. Slightly lower lows following each sell-off have managed to shakeout the weak-handed longs. At the same time, the previous two days have seen capitulation-type volume. Odds suggest a strong reversal is imminent. If it does not begin today, I expect a significant rally within the next week.

I am currently long. Unless the S&P 500 breaks down below the March lows, I am a very confident bull. The markets may remain choppy until there is confirmed resolution on raising the US Debt ceiling (deadline is August 2), but regardless, we could see at least a 50 point rally (ES) in the near-term.

How Low Can We Go?

While I have been patiently waiting for the markets to regain some momentum to the upside and continue the climb to 1400 on the S&P, I have to at least be cautious that this correction may continue down a bit further in the short-term. The continued weakness of late and failure of buyers to follow-through on the bid has to be acknowledged if you are bullish. And when I say acknowledged, I don't mean feared.

It seems that most people are bearish with the recent weakness and that often times enforces my conviction as a bull. So though I am cautiously aware of the weakness in the charts, I am still confident in my long position. With a poor ADP payrolls number on Wednesday, I feel that the negativity in terms of the employment situation has already been priced into the market. Consensus estimates for this morning's employment report at 8:30am EST have now been lowered, so we will need to see terrible data to instigate another sell-off.

Another major reason for weakness over the past few days is the continued contention in congress over whether or not to raise the debt ceiling. I am in the camp that believes that the debt ceiling will have to be raised. There can be debate, but in the end, the US will need to expand its balance sheet even more. This, of course, will be to keep interest rates low and ultimately will keep the markets from falling too much.

In any case, I am not overly concerned of a major market sell-off yet. I see choppy markets that will eventually give way to higher highs. For this reason I am willing to continue to manage my long position.