TOP OF THE RANGE

Ok, just a really quick post here. I have been sitting on pins and needles for the last couple of days trying not to get too convinced of anything as the market has given and taken away. As I am typing the market is down 18 pts in the S&P and to sound more scary- down 172 in the Dow.


What does this mean? Maybe nothing, but you must keep your eyes open and also be aware of the ranges we have discussed. In my last post I added the following comment in the trading wrap up section....


"The market is still within its trading range. We can look for us to sit within the 1110 to 1150 range on the S&P500 unless we have a catalyst to push us in one direction or the other. In the very short term we could have a pullback, but through the end of March I'm looking for a melt up higher. "


Well guess what, we got to the top of the 1150 range yesterday and we have a following smack down with the S&P trading now at 1132. Could we move to 1110? Yes. Should you be watching? Yes.


Other developments -


Keep your eyes on the following items that are of note.



TREASURIES - A LONG BOND BUYER EMERGES?

Someone suddenly has been buying long term treasuries in big quantities over the last two weeks. What does this mean - it means that institutions are starting to bet that interest rates won't rise. This would happen if the market sold off significantly and these buyers stand to gain tremendously if scared investors flood back to treasuries. Remember, everyone believes that interest rates will rise and the dollar will fall. If tons of buyers come back to treasuries, the dollar will also increase - this means trouble for our commodity laden portfolios.

What is our mantra? If everyone is leaning to one side, a careful investor might slip over to the other side or at least move to the middle to avoid the herd.




SENTIMENT -
Remember what we wrote in the January update - "Bullish sentiment was extremely high". I personally had 2 conversations with traders and they were so concerned with getting in that they never once mentioned that the market could fall and they could lose their money. These conversations are the ones that get me very worried.

GREECE

Greece is in some serious trouble. Their credit default swaps are pricing much higher (read as much greater risk of default). This will put pressure on the EU and the Euro. This also probably explains movements in treasuries and the dollar. - This picture is from Zerohedge - http://www.zerohedge.com/article/greece-cds-hits-fresh-record-funding-crisis-now-official

Defaults from EU countries will drive folks to safety and remind investors that there really is risk out there (something I think they have tried to forget).















PE RATIOS -
I've included a picture posted by Karl Eggerss at http://keggerss.wordpress.com/2010/01/19/are-stocks-getting-too-expensive/. This graphically describes that earnings had better improve dramatically and quickly to adjust the P/E ration back into some normal territory. As we all know, stocks have advanced in a huge rally on the expectation and understanding that the world was not coming to an end and that the world and the US consumer would again go back to the binge buying and credit enslavement.















I like Karl's approach here and this graphic is very telling.

Ok, so what do you do? Watch that 1120 support in the range. If you are in cash, this could be your buying opportunity. If this level falls, perhaps an exit might be in order. As you all know, these have been opportunities to add to positions. Remember July, September, and November? At some point the buy the dips won't work and the ranges will fall apart, until then, keep on your toes.