Saturday, February 19, 2011

Collective Attention: when it turns, the trend changes

Since the end of November, resistance has been futile, and the S&P500 and Nasdaq are up well over 14%... and the bull trend has gotten “long in the tooth” so to speak....

If and when market players turn their collective attention to one of several events, or triggers, a meaningful correction in price trends will occur. Will it be:

1  A shutdown of the Federal Gov: “Feb. 19 (Bloomberg) -- The Republican-controlled U.S. House of Representatives voted to cut at least $61 billion in federal spending this year, setting up a budget confrontation with Democrats that threatens a government shutdown.”

2  Negative geopolitical event/ worsening or negative outcome of a revolution in a middle eastern country (Libya, Saudi, etc...).

3  Ben Shalom Bernanke opening his mouth in front of Ron Paul or Paul Ryan during one of the upcoming hearings.

4  Or any one of a number of economic issues in the USA or Europe, there really are too many to list....

Collective Attention: when it turns, the trend changes....

FED liquidity via POMO debt monetizations is sure to continue for at least a few more months, providing some support to those buying the dips.  But if market players have their collective attention and "awareness" fixated on a new round of QE (quantitative easing), and lose confidence in the reflation theory, that attention is likely to turn to something negative for a period of time longer than it takes to enter an order to "buy the f**ing dip."  And when that moment comes, a meaningful downside correction will occur.  When do we reach this point?  Obviously no one can predict the specifics of the future, but we can predict its nature...and we can judge when the probability of the occurrence of an event is increasing.

Similar to the small child in the backseat of the car who keeps asking "are we there yet?" bears have been asking "is the top in yet?" and have been predicting the demise of this bull market for quite some time.  At the time of writing this post, price action is still bullish, and dips will continue to be bought until collective attention no longer warrants it.  Technically the price action on the equity indexes is mostly positive, but it is important to note that dramatic trend changes usually occur when least expected, hence the need to utilize a trading strategy that is properly aligned to market conditions and risk levels.

Would you want to buy and hold for the long term at these levels? Perhaps there are some dividend paying large caps stocks that can be considered value plays but in my view the only answer is vigilance and agility, and the ability to exploit price action and the volatility that drives it, and I continue to favor short term trades in both directions utilizing option spreads.

~ John T. Bardacino, CAIA