Confessions of a flip flopper

On Tuesday surprisingly bad service sector data did the market in before it really even had a change to get going. American markets joined their global cousins in a route. The Dow Industrials lost 370 points, closing at 12,265.13, while the Nasdaq lost over three percentage points, down 73.28 points, closing at 2309.57. The more broadly based S*P500 also got hit hard, losing a little over 44 points and closing at 1336.64. Unlike yesterdays decline on light volume, volume was heavy across the board today. This would suggest that the Bear Market in Equities remains alive and well at this point. Long term and short and intermediate term investors/traders should remain heavily invested in cash, though some sectors are starting to show some signs of being “sold out”.

Just the other day I commented that I thought we might be getting ready for a rally of some duration. I based this upon volume patterns and starting to see what looked liked bottoms forming in some financials, transports, housing and semiconductor names. While some of these still are showing decent relative strength at this point, the overall tone of the market is obviously still bearish. As stated above caution should remain the order of the day.
Specifics: One of the most bullish signals in any stock is when bad news comes out, yet the equity continues to rally. This tends to show that the sellers are “sold out”, or that the news was not as bad as the big money thought It was going to be, only the media and public was surprised. A similar situation is starting to develop in the US Dollar. Everywhere you look it's doom and gloom about the incredibly shrinking dollar. I have myself commented on it a number of times. The dollar has, however, started to ignore traditionally bearish events and data, for example the Federal Reserves running around like a bunch of clucking chickens and reducing interest rates twice in one month. Equity traders should watch UUP, which is the ETF that is based upon strength in the US Dollar. Rydex also has a dollar fund, either of these bear watching, I have a small dollar position on right now that will increase if the market continues to move in my favor. Another group that looks to be losing steam in spite of media and political clucking is Oil, both the commodity and the stocks that are dependent on the commodity. OIH, or DUG (short energy) look pretty nice do me, as do individual stocks such as XOM. Finally, while losing some ground today, the homebuilders did manage to put in a better performance than the overall market, as did truckers.
In wrapping this up, the order of the day remains caution and discipline. With all of the available equities, commodities and ETFs out there now investors and traders can easily get carried away. There is a common misconception that being a trader means always being “in the action”. I can tell you for certain after 11 years that if I had continued to hold onto that belief, which I also held earlier in my career, I certainly would not be here today managing money for clients and writing this commentary for you. It's perfectly ok to sit on the sidelines, CASH is a trade, you actually get paid a little bit for having it, so don't fret too much. Easier times will find us again, periods of time that do not require taking larger risks for smaller gains. Remember that if you lose 20% of your account you have to gain 25% to get it back, and if you suffer a 50% drawdown you are required to make 100% on remaining capital just to get back to the starting line. It's just not fair!, but that's the way it is. Always keep your eye's open to opportunity, but remain cautious in this difficult enviornment.