Trading In, Buy and Hold Out !

Kevin Lane is one of the founding partners of Fusion Analytics, and is the firm’s director of Quantitative Research. He is the main architect for developing their proprietary stock selection models and trading algorithms. Prior to joining Fusion Analytics, Mr. Lane enjoyed success as the Chief Market Strategist for several sell side institutional brokerage firms. In those capacities he oversaw the firms’ research departments. He produced a broad range of widely followed institutional research publications ranging from industry specific notes to quantitative/fundamental reports on individual stocks. His buy side clientele consisted of many of the nations top money managers and hedge fund managers. Mr. Lane is a member of the Market Technicians Association.

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On 3/10/09 we said ” Market internals (ie. the number of advancers to decliners and up volume to down volume) on today’s advance were the most bullish internal readings seen since the move off the 2002 lows … ”

We also said ” When the skew of advancers to decliners and up to down volume is this strong it suggests almost a buying panic on the part of institutions to get back into the market. Additionally these strong internals also suggest that there is a confidence and conviction on the part of institutional buyers”

And last but not least, We said ” That said we believe today’s rally is the start of good move higher (again it may not be the ultimate low – only hindsight will tell us that) however the surge of momentum suggests this rally will be worth participating in. ”

So here we are not many days later and up considerably from where we published those comments and now what ?

We still believe the combination of the market getting really oversold, attractive valuations, excessive negative sentiment, portfolio managers having a lot of cash on hand and the quarter end for many mutual funds coming up (ie. Window dressing time. After all if returns looked poor again more redemptions would follow) (and they last thing they want to show is down another 20+ %) led to a lot of capital redeployment. With the market moving higher quickly even more managers felt they would lag behind their peers and subsequent benchmarks thus even more money (ie. managers chasing the move) came into the market.

In addition was not unrealistic for many to think the stimulus package (no matter what you’re thought on its long term ability to be effective or not) will goose the economy to some degree at some point in the not too distant future. So that said we continue to view this current rally as having legs with maybe another 10 – 15 % up from present levels (So buying on dips with appropriate stop losses would make sense for the time being). We also continue to view this as an opportunity to make money on the long side for a narrow window of time (1 to 3 mos).

However, ultimately we think this rally will fade and we will get a retest of the recent lows (check the history books, we almost always get a retest.) How the market handles that retest will tell us a lot in regards to the longer term picture. We believe tech and growth (since they have the best bases and most constructive chart patterns and corrected much less than the broader market during the down draft) still outperform in regards to sector and style bias respectively during this rally/bounce.

In Barron’s this weekend, one portfolio manager, Felix Zulauf, made an articulate case that this will be a violent rally (900 on the S&P 500) followed by a move to new lows (450 on the S&P 500) with that ultimate bottom coming in 2011. This certainly in plausible and would anyone doubt it after what we saw in the last 12 months ? especially if this is a multi-year secular bear. However we believe at present the best one can get from this market is to try and dissect it and game plan for shorter horizons such as 1 to 3 months until more macro economic data allows for longer term forecasting comfort. This is a market where traders will continue to dominate and thrive (provided you try to capture return both on rallies as well as declines). For the foreseeable future Buy and Hold strategies should be kept on the shelf if one wished to make return.

Look for our full blown reports on the S&P 500 and NASDAQ 100 tomorrow, which will provide greater insight into levels where they rally may peter out.

As always don’t BUY BLIND !! Have an exit strategy before you trade/invest (and stick to it) !!!