Tuesday, November 30, 2010

Market thoughts and strategy

I am running short of time but I thought I would just jot down a few thoughts before the market open. Despite the major indices closing in red, yesterday was a bullish day. A successful test of the lows followed by a close above MA(50) on S&P.  Normally, reversal are hard to call but today's was relatively easy with there being many indicators pointing towards the reversal. Firstly, the market reversed at 1173.01 with the recent lows being 1173. Secondly, the financials were relatively strong throughout with GS leading the way. Thirdly and this according to me was the most important feature yesterday, the strength in crude oil. 

So, all good for the bulls yesterday but let's just step back and look at the larger picture. What changed yesterday? Nothing! Absolutely nothing. Let's not get carried away just because the market finished well off lows yesterday. The markets are still stuck between a range of 1173-1207. Today's action marks 1173 as the line in the sand, but if you are bullish, you don't want it to be tested repeatedly. Ideally, one should see bounce off support, not consolidation above it.

What's the strategy here? My strategy here remains the same as it has been for the past week or so. I have been saying that this is a stock picker's market. Until we don't break the above mentioned range on the S&P, just forget about the general indices. Yesterday, for example was a great day for playing oil stocks. Just go with the strength but don't get too greedy. Personally, I had a nice run in IO (still holding half). I posted this on twitter before getting in it, so hopefully some of you readers got into it too! 

To wrap it up, here is my strategy for these markets:

(1) Concentrate on momentum stocks until the S&P breaks out of the 1173-1207 range. Which side it breaks, I am not really concerned.

(2) Take profits quickly. At times, one fancies the odds of going for a home run, but these are not those times. 

(3) End each day with a sizable cash position. Between Europe, Korea and China, we are in a news dominated market with gap ups/downs being the norm for the past week or so. A healthy cash position acts as a hedge for the unexpected.

(4) Lastly, I am still not prepared to short the markets here. Reason? Look at the action yesterday!

Take care and good luck!

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