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Pain Pain Go Away, Little Johnny Wants to Play

Published on April 28, 2010

Pain Pain Go Away, Little Johnny Wants to Play

April 28, 2010

Markets needed a reason to clear at least some, if not all, overbought circumstances. The way I see, markets are overstretched, overbought on all parameters i.e. daily, weekly and monthly. But does anybody really care? a lot do actually, but after the fact. Dow, S&P500, NDX100 all pulled back soon after reaching into the resistance  zone i.e. 11,250, 1,225, 2060 respectively. One may assign reasons like Goldman’s testimony, Greek Debt cut to Junk, Portugal and today’s Spain rating cuts; but in the end, market participants probably want to give bears a chance to clear some of the over optimism, at least for short term before next upleg starts.

Overall, Yesterday’s action was awful. It was a 90% volume down day that too on expanding volume; roughly a week after another 90%down day on April 16th (which was a one day wonder) so we need to see yesterday’s action was another 1day phenomenon or we going to see a follow through. Typically, markets observe 2-5 days technical rebound after such a sell-off. In spite of the sell-off, the EW credit spread I shared is already up +8.8%.

For OPNewsletter, we are doing fine, though missed bigger profit opportunities. No coulda, woulda, shoulda! OPNewsletter is designed for income trading and hence risk management takes precedence over a “potential opportunity”. Here is what I mentioned in the live general market commentary for OPN Members-

S&P is just 10-15points shy of the 61.8fib point of retracement, which is also a simple resistance area. As i share time and again, that no can really time “when”, stock market just doesn’t seem to pause, and continue to frustrate those who are on sidelines; is it waiting for them to come and join to clean the leftover, before the party ends? no one knows. See chart attached monthly chart of past 25years or so, markets can remain overbought for an extended period of time…

the 2007-09 is a classic example of how wall street works; weren’t these the same analysts who were talking so bullish about everything before things fell apart; when the company executive themselves can’t tell about the future; i wonder how will the analysts do? how expensive are the markets,  http://hussmanfunds.com/wmc/wmc100426.htm

“As of last week, our most comprehensive measure of market valuation reached a price-to-normalized earnings multiple of 19.1, exceeding the peaks of August 1987 (18.6) and December 1973 (18.3). Outside of the valuations achieved during the late 1990’s bubble and the approach to the 2007 market peak, the only other historical observation exceeding the current level of valuation was the extreme of 20.1 reached just prior to the 1929 crash. The corollary to this level of rich valuation is that our projection for 10-year total returns for the S&P 500 is now just 5.3% annually.”…

Here is the other side of the story (Stocks in U.S. Cheapest Since 1990 as Analysts Boost Estimates)
http://www.bloomberg.com/apps/news?pid=20601087&sid=ayxUdbONKGwo&pos=7

My bottom-line, It ain’t over till it’s over….have fun, but be careful 🙂

This month, we opened two Iron Condors. Though we chose to close RUT Iron condor, I decided to keep NDX as it was approaching the resistance area-

Since we started this condor, NDX has moved 100 points!!! That’s an amazing run and tough luck for the income traders; We are up +4.4%; I don’t this market can be termed anywhere near to sideways markets which are the best friends of income traders. Having said that, NDX is now very close to one of the strongest resistance i.e. $2,058/2,060; pls look at the 5 year chart attached, the resistance is two folds a) previous resistance and b) also a 161.8 fib extension from the previous upleg.

Before I share my risk management plan, let me share a perspective. There is no such thing in stock market/trading as one specific number for either support or resistance. Wash-and-rinse is a common occurrence to get rid of the weaker traders; there are several scenarios i.e. soon after touching the 2,060; or closing above that level today and pull back tomorrow; or move significantly higher and then retrace just before close; and/or finally move up and away and never pullback anything may happen, so you have to be on guard to ensure that capital is taken care of.

As I mentioned earlier, current situation requires caution. The incremental gains are going to be tough going forward and at times we may observe abrupt pull-back(s). As more and more retail money flows into the market, I, from a contrarian perspective, think that this requires cautionary trading. Mr market usually doesn’t care about the little John i.e. retail trader/investor like me. Oh well, maybe the smart money has already sensed it and hence decided to start selling equities.

So is the party over for the little Johny? Only time will tell us.

Stay cautious, Stay profitable

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