M’s, W's, and Relative Strength

Sorry about Rock’s unavailability over the last couple of weeks, but we’re finally seeing some progress on the home front. I’ve been out of the trading scene for the relocation and unpacking weeks, so don’t have any real feeling about the progress of the tape. And, I haven't had time to catch up on the blog comments.

A couple weeks ago, I commented that I felt we would see significant chop around the 1100-1200 range. I can’t remember the numbers exactly, but looking at the tape action , it seems this chop is in fact happening. I don't like this chop especially with big overnight moves. I haven't been trading, but it's hard to make money with this kind of market.

It seems we’re starting to do the turnaround, with the previous 110.27 low still intact. Looking more closely at the numbers, it seems we may be forming a series of w’s where the right side is higher than the left. This is bullish in the long run, but it takes nerves of steel to stay in over the long term during this chop.

I think the big question is what will break us out of this chop, and in which direction the breakout will happen. Here are the factors I’m considering:

1. The breakup of the Euro. If Merkle decides to support the greek sovereign debt problem, she’s likely out of a job, and will be replaced with someone without that sentiment. I think I heard the greek 2-year bonds are running around 50%. Wow.
2. Dollar strength is likely to improve. I need to get out of my RMB investment. There will still be the “flight to quality”, and as Japan proved, the condition of a country's economy is of no concern for the strength of its currency.
3. Bank contagion over exposure to euro debt. The reports I’ve seen indicate the US bank exposure is fairly low and containable. Maybe Buffet’s right and a long position in the banks should be considered. Every time I hear what Buffet is doing, I short his position short-term and prepare to get out on a reversal. It’s made money for me every time.
4. Nobody’s paying attention to the debt ceiling anymore. Now, Job creation is the focus. Who cares about debt. Just our grandchildren, I guess (too bad they don't know it yet). It seems the world agrees, with the strength of the dollar reflected in this support.
5. As I’ve said before, we’re in recession. The numbers are beginning to show it, so to fix it, the government needs to adjust the price of housing lower. This is easily done, so the government numbers will show we’re not in recession. This is a 2 edged sword, because it basically ties Bernank’s ability to do anything—why do something when we’re not in or headed to official recession?
6. The market almost always falls after the President speaks.
7. The confidence numbers are low. This is one statistic the government economists can’t fudge. This will be very difficult for Obama to overcome in any election, so he’s really got to try to do something in the short term. IMHO, nothing can be done in the short term so he’s burnt toast.
8. Austerity programs cause economic downturns. “Ok, Princess, how low can you go?”

So where’s the money flowing during this downtrend leg (besides out of the market, in general)? To try to get caught up, I’ve done yet another herds 5-day RELATIVE STRENGTH analysis. Here it is. First, the worst performers:

TAN -9%
KRE -4.8%
$BKX KCE KBE –4.4%
XLF –3.3%
UCC –3%
IAK XES -2.6%

And the best performers:

$DRG.X IHE IYH XLV IBB 2%
XLU 2.5%
GLD 9.6%
GDX 10%

From an investment perspective, the only ones making money are GLD and GDX. It’s interesting that the Solars are taking the pipe big time.

Again, the “Relative Strength” is a cumulative 5-day performance relative to the performance of the SPX index.

Trade safe in this chop, folks.