Upside Bias Still in Control

I am beginning to enjoy the the articles and commentary about the market relative to the direction going forward. Don’t get me wrong, we all make predictions as to what we believe based on our analysis. The enjoyment part for me comes on how emphatic some are relative to the direction. There was a post yesterday from a financial analyst that went to extreme lengths to explain how the market is overbought and it will correct back to the 1240 level on the S&P 500 index. Right or wrong, I would love to understand how you become so convinced you know exactly where the market is going and in what time frame it will happen. Technical analysis allows all of us to have an understanding of support and resistance, trends and consolidation. The challenge comes in the reality versus the drawings on the chart. There is one thing I know for certain, the more you think you know what the market is going to do, the less likely that is what it does. Thus, myĀ belaboredĀ point… have a plan, but be flexible enough to adjust to the reality what the market does versus what you believe it will do.

As much as some believe that stocks are overbought, I have been looking at the chart of bonds. Below is the chart of TLT, iShares 20+ Year Treasury Bond ETF. You can see over the last six months the fund is down 11.5%. That is a significant move lower for bonds. If the correction, pullback or sell off occurs in stocks I would look for bonds to rally in return. This is a sector worth our attention as the downside is likely ahead of itself short term. Remember we are short bonds and if the downside continues further we benefit. However, if they bounce we would hit our stop and look to take advantage of the move higher. Thus, we have a plan and we simply follow the trend and respond to what the market does versus what we think or believe being forced on our portfolio.


LQD, iShares Investment Grade CorporateĀ Bond ETF likewise is showing downside pressure. The fund broke support at the $120.40 level last week and is testing lower again. In the broader universe of bonds the issue is simple… investors are willing to accept the risk of stocks going forward and it will shift the balance of power from bonds to stocks. That is accomplished by investors selling bond in a willingness to accept the risk of stocks. Money flow from bond mutual fund to stock funds is already being reflected in the numbers being reported. Watch the downside risk to bonds and know where the exits are if you are still in possession of bonds in your portfolio.

Last night Amazon posted earnings and the stock rallied 9%. Without getting into the why and how, I would like for this move to be a spark for the NASDAQ 100 index to break through resistance at the 2750 level. However, Broadcom disappointed on their guidance relative to earnings and they could work against each other today. Either way watch the NASDAQ 100 index to break higher.

The energy sector remains the leader over the last couple of weeks and XLE broke to a new high on Tuesday. Volero was up 12% and Hess also jumped 9% on earnings Tuesday to lead the sector higher. Oil services (IEZ) sector hit a new high as well and the exploration sector (XOP) is pushing towards the September high. Crude oil moved above $97 per barrel and gasoline (UGA) hit a new high on Tuesday as well. The sector momentum has been gaining speed since the beginning of January. After hoursĀ ChesapeakeĀ Energy’s founder and CEO agreed to retire in April and the stock is up 9% heading into trading. The sector remains a positive short term for theĀ broadĀ market index.

Consumer Staples broke to a new high on Tuesday. The defensive stocks are gaining despite the growth stock leadership in the current move off the November low. Healthcare posted a new high as well with help from Pfizer earnings on Tuesday.

The key is to enjoy the ride, but protect the downside risk of each individual position. You have to manage the risk accordingly. The markets continue to trend higher, but they are technically overbought and could correct or pullback at any point. If you are prepared you will know how to react. If you are not prepared you will make decisions based on emotions versus logic and that generally doesn’t end well. Let’s just take it one day at a time and maintain our focus.