Waiting and Watching

In my previous post I stated that the rally had ended on artificial GDP.  Since then the S&P has traded sideways, but has not pushed to new highs.  I still think the top is in for the year, but as the adage goes, bottoms are points in time; tops are processes. 

It's been a difficult trading year for me, for many reasons, but the bottom line is I have not had a good feel for the tape since the spring.  But this is no time to throw out the risk management techniques that got me here.  Even with the 21% rise in the S&P so far this year, we're down more than 30% from the highs.  The best traders, the ones who have been able to look past economic fundamentals and play the game for gains, have done very well this year.  I am not there yet.  Like many who were bearish, I avoided the crash but missed much of the rebound.  All in all, I'm better off for it, but it does make the current market a tad...boring.

So what next?  I don't like the risk/reward here, so I'm not going to invest broadly in the market.  Individuals, companies, cities, states, and countries still have an enormous debt problem that has not been solved.  It doesn't need to be solved for the market to go up, but if it is not acknowledged then a financial crisis could return and quickly.  And behind the scenes, I think many are aware of this.  If the economy is really strengthening, why the talk of more stimulus?  Why not raise rates from crisis-level lows?  The reality is that as an economy we are still living off of maxed-out credit cards.

Anyway, so what's a bored market watcher to do?  Not much, really.  Dividend plays like JNJ and ABT are sitting in my account, collecting dust since I bought them in the spring.  I may never get those prices again.  Ultrashort ETFs are, frankly, necessary evils that helped me last year but hurt me this year.  Unfortunately, they are the only way for me to get short at this time.  So I'm waiting and watching.  In the meantime I think the best thing to do is to get one's overall financial house in order (reduce debt, save, etc) while waiting for better opportunities.    

Rally Ended On "Good" (But Artificial) GDP

Yesterday the market was waaayyy up on the GDP report, which struck me as a bigtime sucker's rally.  I added to my shorts.  Why?  GDP was widely recognized as artificial, propped up by cash-for-clunkers (which is now done) and the home buyer's tax credit (which is expiring).  Barry Ritholtz, as usual, summed it up well:

A large chunk of the gains — 1.66 percentage points — came from Car sales in the form of cash for clunkers; this will not be in the Q4 data.

Home building soared 23.5% — reflecting a combination of zero percent interest ratyes (ZIRP) and 1st time homebuyers tax credit. That was good for another 0.5 percentage points of GDP.
Well over half of the gains are therefore government related.

Also of note: Nominal GDP was below forecasts, thanks to a surprise 0.8% gain in the deflator (That also added to the REAL GDP figure). Hence, a chunk of the gains are pure inflation.

I'm not sure why the market was up so much.  My guess is that it was a technical bounce off the 50-day, some short covering, and the smart money pushing things up so they could get out.  That's the game of Wall Street -- the smart money knew the rally was built out of straw, but they took advantage of it as long as they could.  That GDP number was a classic sign of a rally ending on so-called "good news".

I've taken a small hit on my biotech plays, ISIS and MYGN, but both are hanging in there today.  I want to hold them through their upcoming earnings reports.  My shorts are doing what they're supposed to do, and now that I survived yesterday's shakeout, I'm looking for another leg down.  Of course, the 50-day could still hold today and that leaves the door open for another rally, but in my view (which has been wrong for a while now), the party is over for a while and the bears are taking control.

Thoughts As We Test The 50-Day MA

Most of the stocks I monitor regularly have been steadily weakening over the past couple weeks.  The S&P 500 is only down around 4% from its recent highs, but it feels weaker than that, doesn't it?  Not coincidentally, the dollar is strengthening.  Here's a dollar ETF that I own, and notice the big spike in volume along with the recent move up. 

In my opinion, a stronger dollar is good for the economy in the long run, but bad for stocks in the short run.  Stocks and all types of risky assets (like commodities, metals, etc) have been rising because of the sheer amount of money being printed and low interest rates.  Conservative investments have been rejected (because they produce no return--have you checked your savings account or CD rates lately?), and risky investments have been embraced, with all sorts of hubbub about the end of the recession.  Whether the recession is over or not (or if we have another one), it's risky to be bullish right now.  A consistent move down will have people questioning the recovery, remembering their losses last year, and running for the exits.  The market is a psychological playground, and we all know what happens when greed turns back to fear.

What's happening now?  The riskiest assets (emerging markets, tech, etc) are dropping the fastest.  The S&P 500 probably has a date with its 50-day and then 200-day moving averages (near 1050 and 985, respectively).  Actually, we are at the 50-day as I type this, so it'll be interesting to see how the market reacts.

I am long two biotechs (ISIS and MYGN) but had to trim my positions as they are not working.  I'm also short real estate via SRS and emerging markets via EEV, and am holding them for now.