Monday, Early Evening

Another Melt Up day on Wall Street, driven by POMO, with the Dow up 70 and the SPX up 18, on 60% of average daily volume.  While the Dow and SPX made new recovery highs with an increase of 0.57% and 0.72% respectively, the Transports increased 0.30% and remain well below their 1/18/2011 recovery high.

I feel the pressure to place a new short trade, as long as the Momentum Change indicators are on a Sell signal.  But the bottom line is always Capital Management, and I don't want to enter the market again on the short side until I get a confirmation of the original 1/20 Sell signal.  Of course, if Momentum does flip to the Buy side, I will recommend new long positions, but not yet.

Many investors are anxious to get back into the market, especially anxious to catch the moves to the upside.  But there is one BIG caveat.. what is the risk?  It is in fact Risk Management concerns that I have developed the Proprietary Momentum Change Indicators.. to signal when market direction is changing.  However, there are two separate concerns.. a Sell signal should get a long position out of the market, as Risk to the Long position is too great.  It does not necessarily follow that  a Short position should be entered.  But if one is disposed to trading the short side, it is at the time of the new Sell signal that one should take a new short position.

The cash generated by the sale of a long position can either be parked in a money fund until such time as a new Buy signal is generated or look for a place to enter a new short sale.   If a new short position is entered, it must be protected by a nearby stop loss.. I like to use the most recent lower swing trade close.  It is not unusual that a trade can be stopped out, while the direction is still expected to favor the trade.  Because risk management requires a safety valve that protects against significant losses developing while waiting for a winner.  Every long term investor I have ever met became one because the short term trade he loved did not work out initially and he held on, waiting to be right.

I think there are 2 really big opinions to be held regarding this market.. what is the short term outlook and what is the long term outlook?  Holding a strong opinion about 1 does not invalidate the other.  I held a long term Bearish from October,  2007 until April, 2009.  At that point, I changed both my short term outlook and my intermediate term outlook to Bullish, and I expected to hold that outlook until the Spring of 2010, when my intermediate term outlook and short term outlook flipped to Bearish.  I have been Bearish with a long term and intermediate outlook since 4/2010.  All of my signals since that time have been short term, from several days to several months.  Today, my long term outlook is bearish, as is my intermediate outlook.  So let me strongly suggest that any Sell signal from my Momentum Change indicators is likely to be signaling the actual final top of this rally.

But as we have seen, some times the Sell signal does not mean that the indexes will not continue higher.  In the current case, the Momentum has actually diminished while higher prices are being posted. So until Momentum changes back to the Buy side, I will continue to suggest that long positions be closed, and await a new short term Buy signal, or a confirmation of the 1/20 sell signal to re-enter the short side.

Best to Your Trading!

Bill