Trade Ideas for 11/20/09

The market began pulling back just after yesterday's strong finish, continuing until around noon ET today, then bounced into the close. It happened in a roundabout fashion, but the high in the S&P has so far followed the timing pattern of the topping trading range discussed previously. Tomorrow we have options expiration; if the market should sell off into the close, look to book partial profits in any short positions initiated in the past two days.

There's reason to believe that the top put in this week is a significant one. At this point, the market has played so many tricks that it has worn down the skeptics. But evidence of deterioration in the quality of the rally mounts, and it's now at the point of being plain ugly. I'll present the two most egregious pieces of evidence.

First, we have the performance of the Russell 2000. This is a broad-based index focusing on small-cap stocks. Generally, it represents greater risk appetite, as small-caps outperform mid- and large-caps during bull markets. This index put in a lower double top in October and a much lower high this month, in contrast to the S&P which made higher highs on both those occasions. Such a glaring contrast does not happen in a strong uptrending bull market.

Speaking of risk appetite, the above chart represents one of the riskiest sectors of the market, technology, as represented by the Nasdaq Composite index. While this index made higher highs on both occasions, I have overlaid the Bullish Percent metric behind price. This metric measures the percentage of underlying stocks in the index that are in a technically bullish configuration, as determined by point & figure charting. It is hard to believe such a dramatic drop-off in bullish percentage could occur as the index rose to new highs, and it is an indication of incredibly bad breadth. (To wit, over 40% of the component stocks are in downtrends, yet the composite index makes a new high).

The counterargument is that investment money is undergoing sector rotation, and we are witnessing a rotation into large-cap defensive stocks. While this is true, to buy this argument as a statement of bullishness is to accept that money will rotate once again into the higher-risk assets. We would need to see the Russell 2000 and the BPCOMPQ in uptrends for this to be sustainable in the long-term. But there are many ways to attain short-term performance at the expense of the long-term, which is another way of saying that the market can continue its upward trek in the face of these pressures, although it risks exacerbating the long-term outcome. On a timing note, it's worth noting that in 1938, the market bottomed in March and topped in November, both of which ended up being multi-year price extremes.

We bought QID today.

Current Holdings
Ticker	Basis	Closing Price	Perf.	Sell-Stop	Addl Exit Guideline	Chart
TWM (trending)	27.58	29.22	+5.9%	27.27	N/A	Chart
QID	21.31	21.14	-0.8%	20.39	N/A	Chart

Tomorrow's ideas include a weekly setup in high-risk TZA, which, if elected, we'll try holding overnight.

New Trade Ideas

Ticker	Entry	Exit A	Exit C	Chart
TBT (Ultrashort LT Treasury)	46.16	45.12	N/A	Chart
TZA (Small Cap Bear 3x)	13.11	11.73	11.12	Chart
SH (Short S&P 500	54.36	52.86	N/A	Chart
SKF (Ultrashort Financials)	25.01	23.89	23.49	Chart

Please refer to "How To Trade The Ideas" (right-hand side) to read this table.