Resilience or Bull Trap?

The NASDAQ was up 0.4% and the Dow Jones was higher by a more impressive 0.8%. Both Small Caps and Semiconductors were up 0.7%. The Volatility Index (VIX) fell a whopping 7.3% to 11.98; this does not bode well for the Bulls as fear for the downside is starting to wan. Volume was strong but we were under whelmed with our key tell stocks performance i.e. Intel (INTC) down 3.2%.

Universally, traders are contemplating whether to classify this market as resilient. The answer to this depends very much on ones definition of resilience. Does the fact that the stock market holds up well with the plethora of bad news during the last two months deem it to be resilient or could other forces be at work? Our definition of market resiliency is when a stealth bid exists which is later discovered to have emanated from large smart institutional buyers. The theory is that only these particular buy and hold purchasers of stocks have the tools and foresight to make the best strategic buying decisions. Even with their tremendous size, they have adapted and learned to move stealthy.

In this particular market we believe the bid is coming from small, amateur, Hedge Funds. These traders are emotional and are likely very underinvested at this time. As their pain increases from holding too much cash, they capitulate little by little, one by one, and create the steady drift higher in the market that we are all experiencing. As they experience small bits of success, they are emboldened to take larger leaps. Ultimately they are up to their eyeballs in exposure usually when the market is most extended.

This is the moment that is most dangerous. Unlike the large strategic institutions, these quick fingered traders search for the exits all at once in order to eject all of their exposure. Thus, the market gets subjected to vicious Cliffs which begets even more selling.

So if your definition of resiliency is simply a market that holds up well in the face of bad news, then you better be nimble. We prefer to define a resilient market as one that not only holds up in the face of bad news but will be void of these sharp Cliffs. It is important that stocks are placed in the hands of serious buy and hold purchasers. A technical sign of this would be stocks or indicies that rise and base continuously as opposed to sharp chopping action within a tight range.

If You Held a Taser to Our Head: We will maintain our 30% market exposure and are willing to enter quick intraday trades with tight stops. The NASDAQ may still approach our target of 2190 but we are overbought and late in the rally.

Enjoy your weekend. See you on Monday.

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