S&P 500 Index Analysis

[DrChen]

Dec. 27, 2010

Analysis:

Many signs point to an overly optimistic market. VIX has dropped to the lowest since April 12, and the 10-day average of the CBOE's equity put/call ratio has stayed below 0.5 for eight consecutive days. Also, the CBOE's Implied Correlation Index has risen steadily over the past two weeks, boding ill for an upwardly trending market. Although the market has overlooked many negative factors in the economy, the events that will trigger a reversal are difficult to predict.

Strategy:

Hold short at 1238.55

 

[Nine_Ender]

I'm calling an upward move next few trading days to test 1300 level. Go long immediately.

 

[DrChen]

Nine_Ender,

Given the overly bullish sentiment, hardly any Bulls have not already been long, and hardly any Bears dare to remain short, so I do not see a reason for the market to rally further. To the contrary, the market is inching higher on a thin trading volume, potentially paving the way for a minor correction -- around 3% but no greater than 5%.

Dr. Chen

 

[Nine_Ender]

Quote from DrChen:

Nine_Ender,

Given the overly bullish sentiment, hardly any Bulls have not already been long, and hardly any Bears dare to remain short, so I do not see a reason for the market to rally further. To the contrary, the market is inching higher on a thin trading volume, potentially paving the way for a minor correction -- around 3% but no greater than 5%.

Dr. Chen

And I disagree, because markets are forward looking and first quarter earnings and dividend growth look very promising. We are climbing the "wall of worry" quite nicely as most bull markets do.

In fact, I believe the markets are playing a good trick on people who tend to overthink what is happening. There is a LOT of retail money that hasn't participated yet, and with each market rise ( no matter how small ), the overwhelming feeling will become that trading profits are being missed. Bonds simply are not a good place to have your money anymore ( now that's a topped marketplace ), people are going to buy equities even if their payoff is just a few percent it beats anything else they can own right now.

 

[DrChen]

Nine_Ender,

It appears that you and I are predicting the market actions in two different time horizons. I never disagree that we are in a bull market, but I only predict a correction of 3% in the current bull market. To put our differences concisely, you predict ¡°an upward move next few trading days to test 1300 level,¡± whereas I predict a market correction of 3% before it reaches 1,300. Thanks.

Dr. Chen

 

[Pekelo]

Somebody call a doctor!!!

After 4 months, down -27 pts realized and another -30+ pts unrealized loss. But keep it up, you give great value to this site!

Oh yes, and Happy New year!

 

[Nine_Ender]

Quote from DrChen:

Nine_Ender,

Given the overly bullish sentiment, hardly any Bulls have not already been long, and hardly any Bears dare to remain short, so I do not see a reason for the market to rally further. To the contrary, the market is inching higher on a thin trading volume, potentially paving the way for a minor correction -- around 3% but no greater than 5%.

Dr. Chen

Still holding a short hoping that tha market will reverse trend instantly when every piece of news suggests more upside ?

This is what I don't understand, your thread is about trading on news but you constantly make the rookie mistake of holding your losing trades but occasionally cutting your winners mid run.

Instead, you are running a "Deadbroke" kind of thread now holding a short until the next correction occurs, but isn't 36 points on an Index awfully expensive trading wise ??? You'd have to be pretty rich to run this strategy.

 

[Nine_Ender]

Quote from DrChen:

Dec. 2, 2010

Analysis:

Yesterday's Analysis predicted that "the Initial Jobless Claims will confirm the continued downward trend in the four-week-average Initial Jobless Claims," and that "the market will rise above 1,210." Today the Initial Jobless Claims at 436,000 confirmed the downward trend, and the market rose above 1,210. On Nov. 26 the Analysis predicted that "the longer the market is held below 1,200, the bolder the Bears will become, and the longer they will refuse to admit to being wrong; thus, the more violent the eventual short-covering rally will become." The market's bullish run in the last two days has validated the prediction, although not all Bears have thrown in the towel, leaving an additional room for the market to rally.

Looking ahead to tomorrow, the payroll increase will be at least 155,000 while the unemployment rate will surprisingly drop to 9.5% or lower. The ISM Non-manufacturing Index will increase to at least 55.5. As a result, the market will rise towards 1,230 and settle below 1,228.

Strategy:

Hold long at 1,197

Hold this long until now, and you make 78 points. What exactly occurred in the news that swayed you from this trade, and how was it a new item compared to November ?

 

[DrChen]

Analysis:

The bull market continued its run today despite discouraging Consumer Sentiment on the backdrop of upbeat earnings from JP Morgan. The market will continue its upward move until 1,300-1,320 range before it runs out of steam.

Strategy:

Offset short at 1,290 for a loss of (1,243.40-1,217)+(1,290-1,238.55)=77.85

 

[DrChen]

Quote from Nine_Ender:

Hold this long until now, and you make 78 points. What exactly occurred in the news that swayed you from this trade, and how was it a new item compared to November ?

It is the December jobs report that changed my position from long to short because much fewer jobs were created. But in hindsight the force of the Bulls was too strong, and even a subsequent disappointing January jobs report could not stop the Bulls' momentum. (To use an analogous situation, when Crude ran above $120, the Bears would not have thought that Crude would run up to $147 before a spectacular crash to $40.) I concede that there is no excuse to rack up a 78-point loss in one trade, and I will implement some type of risk-management strategy for future trades.

Dr. Chen