Wednesday, February 11, 2015

NASDAQ poised to take a little breather short of a new 1-year peak

The sharp rally for NASDAQ on Tuesday was quite welcome, but it did seem a bit overdone considering actual fundamentals, so I suspect that a fair chunk of the rally was simply the forced- buying of short covering, a little short squeeze that hit speculators who had jumped the gunned and bet a little too heavily that the recent advance was over, and just a little buying enthusiasm on Tuesday was enough to hit their short stop limits, forcing them to buy to limit losses on their short positions, which fueled further short-covering buying, in an upwards spiral. Bulls certainly see any buying as a good thing, but the problem with the forced buying of a short squeeze is that the angered shorts simply wait on the sidelines for the dust to settle and then pounce with renewed vigor when the underlying buying pressure finally peters out, as it always does. Buying (and selling) pressure is always uneven, so there will always be bouts of corrective action even if a longer-term trend is in place.

NASDAQ futures have been flip-flopping between positive and negative and close to flat since the close yesterday, indicating that we will see a weak opening, without a lot of enthusiasm as people have more than a bit of uncertainty over whether the sharpness of the rally on Tuesday will persist. As usual, the magnitude and direction of the move at the open is not a reliable indicator of how trading will unfold throughout the day.

NASDAQ did set a near high for the year yesterday, but is still about a half-percent short of the December peak and a new 1-year high. We could see a little weakness and a pullback early in the day as a setup to entice some of the shorts back into the market, but then followed by the bulls pulling a jump-out on them and kicking off a renewed short-squeeze to add enough juice to the recent advance to hit that new 1-year high. The big problem is that hitting a high and sustaining that high and very different processes. We had decent highs at the end of both November and December, but they were not sustainable, so a corrective downwards move followed in very short order. I'm less concerned with how quickly we hit a new high than I am with doing it in a sustainable manner, by drawing new and fresh money into the market that will stay for an extended period rather than evaporate as soon as short-term trading volume dissipates, as it always does with significant frequency, as we have seen repeatedly over the past year.

I hate to have to say this, but flip a coin whether we manage to set a new 1-year high today or whether it takes a couple more days. And, it is very possible that there will be insufficient fresh money flowing into the market to sustain that new high before hedge funds decide to flip the switch and reverse their trading bias from risk-on to risk-off so that they can trade back downwards in the wide trading range that lies between the September peak at the bottom and the November and December peaks at the top. All of that said, I do expect a new 1-year high shortly.

I was offline for the entire trading day yesterday, so I wasn't able to take advantage of either the advances or dips of individual stocks. I may catch up today, or I may simple let my current long positions ride a bit longer before taking a little money off the table. My bias will be towards capturing 5% or even 3% gains on my trading positions.

I am also considering what positions in my long-term investment portfolio to trim and reallocate to other stocks to either diversify or to take advantage of dips.

Greece? Ukraine? European sluggishness? Fed rate hike bets for the second half of the year? These are simply distractions, all used as cover by traders and speculators to justify their underlying moves which are based more on the technical reading of charts than on the long-term fundamentals of businesses and the economy of the U.S, which is what will drive the long-term trend. So, my core investment portfolio remains fully invested in stocks for the long-term, but I'll also capitalize on short-term opportunities to trade the volatility that Wall Street layers on top of the long term trend.

-- Jack Krupansky

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