Climate Check July 12

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  • on July 12th, 2011

This is why we do the work EVERY DAY; things can change quickly, for reasons we may have never suspected.  From a rip-snorting bull swing, we saw a hard selloff into from Friday through Monday morning(actually Monday overnight).  Does this put the bigger rally in jeopardy?  A look under the hood tells me that, while this swing is deep enough to hurt some late longs, it doesn’t appear to be doing much damage to the broader leadership.  The evidence through Tuesday’s lunch shows me the following:

Highlights as I see them are as follows:

1) Indiscriminant buying phase ended, but there’s no sign of a broad rollover.  Lingering here for a few days, especially if a backdrop of good news comes that can’t lift stocks, would change this to a more negative picture but for now the intermediate term is weakened but OK.

2) July 7 was one of those thrust days resulting in a massive % of stocks reaching highs; that happens at the beginning of a run or the end.  The bullish case would be a slow expansion to new highs by some of those well before $SPY or $IWM, while the bear case would be a run to new index highs w/o appropriate leadership.

3) Sharp drops and spikes sometimes happen without warning, but if the broader market moves in similar fashion then it’s more of a “reset” than anything.  I see 55% of stocks above their 50 day MA with $SPX around 1320, slight below the 58% on June 30 at 1320 but inside the range of error and timing so not alarming.

I wanted to get more bearish, but the evidence so far doesn’t warrant chasing prices lower(does it ever?!).  I still have 113 buyables to 31 shortables, so buying the dips makes more sense for now.  There is a confluence of activity in the 1320 range that has me thinking we could spend most of the week rejecting moves away from it, at which point this type of evidence can really provide some clarity to the noise.  Given that US stocks weren’t trading in the Monday night massacre, I have no idea how to factor that in but I’m guessing it will be hard to forget for many of us.

Despite the wrangling from the clowns in DC and the Eurozone, the real truth is that our other greatest storytellers(CEOs) are about to come out in droves to sell us on how great a job they’re doing.  Index flatness against broader market selling, particularly if the news flow is good, would be a major problem.  For now, though, I’d lean towards using dips to get long last quarter’s earnings leaders that are now a little cheaper than they were last week.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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