Author: Michael Arold
Covestor model: Technical Swing
Disclosures: Long EUO, QLD, DIG
I can’t repeat it often enough: trading comes down to searching for extremes and divergences by exploring not only price action but also news, sentiment and fundamentals.
I feel there is a huge disconnect these days between headlines, investors’ mood and the market value. This situation prompted me to put more money to work and go 100% long in my Covestor model Technical Swing recently. Let me explain.
I was recently looking at the headlines of major European newspapers and magazines when I had some time to kill at the airport. They were all negative and sounded something like “how to save your money in the light of global default” and “why you should go to cash NOW”. On the other hand, the Euro has held its own against the U.S. dollar this year, and the Nasdaq closed near its highest levels for 2011 on Friday (7/21). Somebody has been on the buy side and headlines have obviously diverged from price action. What will happen if we start to see positive macroeconomic headlines? Maybe a “buy the rumor, sell the fact” response, which would mean that the current rally is short lived. In any case, if you wanted to play that, you had to be a buyer in the last few weeks.
I’m following various sentiment indicators and none of them is currently recording extreme levels, which is another sign that there is not a lot of bullishness but rather some room to run in the market. So again: Who is buying here? I suspect it is the pros, who go against major headlines.
Was it foreseeable that Greece got bailed out? Absolutely. If you understand European mentality and history it was clear there was no alternative. In July, I opened a short position on the Euro via a buy on the short Euro ETF (NYSE: EUO), but I closed it relatively quickly because I saw that negative headlines were not able to create the fear necessary to drive down the currency.
Will the US debt ceiling get raised? Of course. It’s the old game of negotiation and if you were ever trained in negotiation techniques, you know that you need to keep your enemy believing that you will blow up the whole thing if he doesn’t make concessions.
We are in the middle of US earnings season, so I’m careful with trading individual stocks unless they have reported already. Instead I like to focus on ETFs and as of 7/22 I’m long the 2X leveraged ETF (NYSE: QLD) to play current momentum in NASDAQ stocks, and ProShares Ultra Oil & Gas ETF (NYSE: DIG) with the hope to benefit from the declining Dollar and stronger oil. Crude prices should be way lower if the market were really concerned for another global recession.
