So all the bad economic news has come and gone and the S&P bounced off the crucial 200 DMA in a picture perfect manner and is now carving up the handle out of the cup, IBD William O’Neal’s favorite price formation.
Such technicals argue that money managers seem to have decided what to do with all the bad economic data – they are not selling.
It could be argued that the “not selling” part is the cup, while the handle contains the opportunistic ones taking positions and those intermediately indecisive seeking more confirmation and sure, there is plenty to be taken off the table… like Italy and Europe in general, debt limit and Washington, more clarity on China and, perhaps soon, a decisive decision by the market as to which will continue to be the bull, economy or oil.
But as often is the case, undesirable events have a tendency for conflation at the most inconvenient timepoint: Europe and Washington could implode simultaneously, former out of honor and latter out of spite, while the confusion as to what is the dominant China narrative gets hijacked by the panicky narrative of all the bad debt mandarin banks hold on their books.
As for the US, Reinhart and Rogoff soberly point that ”interest rates seldom indicate problems long in advance” and the fact that the 10-year yield is dropping amidst political spite in Washington is blatantly comforting when we know first hand (Europe anyone?) that things in the debt space, to paraphrase Hemingway, happen gradually, then suddenly.
On oil, the time seems to be quickly approaching as to who will remain the standing bull – the economy or the oil. That this decision is well-nigh is suggestive by the banks and hedge funds themselves who keep predicting that the continued economic growth will drive the oil price higher. The problem with this argument is that at some price point the causal relationship reverses, and its not just an outright demand destruction but also tightening response by those whose inflation, already spiked by food, will be deemed intolerable because of oil.
On a more optimistic note, picking off some quality stocks – like Altria (MO) – and getting a little accumulation of them now may be a wise long-term approach when, after sifting through hundreds of charts daily, one cannot find not a single decent trading setup – until last night.
Valeant Pharmaceuticals, VRX, has a bullish flag that has been going sideways between $47-55 for over 3 months. With a stop at around $47.50 the downside risk, as of today, is about $5 while the upside could be as high as $70… for ballpark odds of 3-1 in favor of a bullish breakout.
Of course, much can go wrong with this trade, not just that the VRX is in the pharma space where the government, and not the market, is the determining factor, let alone that VRX has no PE and trades at 3.3 time the book.
Then again, the shorts are at 6.3% of the float and many of those 14 million shorted VRX shares may have to get some cover if things do not go the short way.