After an already steep incline for 2013, the S&P 500 rallied another 3.50% off last Friday’s intra-day bottom, which of course came on the back of a weaker than expected jobs report. The prudent question to ponder at current juncture, just days away from the thick of earnings season (in my humble opinion), is whether risk/reward is still juicy enough to remain or even add to long positions in the near-term. While the answer to that question much depends on ones risk profile and time horizon, in the interest of full disclosure yours truly is happier with a marginal net-short position at present.
Given that price action is the only and ultimate arbiter, the marginal breakout in financials yesterday, coupled with the impressive foot work of the transports and the consumer discretionary sector, one must continue to respect the up-trend even at these lofty levels – that is until it breaks.
The S&P 500 for its part yesterday got cozy close to the 1600 mark yesterday around mid-day, but within 3 points to the home-run took a little breather for the rest of the day. The move also lifted the index back to the upper end of the November up-trending channel, thus for the near-term worsening risk/reward to the long side.
The Russell 2000, while not breaking to new highs did get within inches of its year to date highs and how sits against a nicely defined line of resistance. Very simply, a break above there would ask for upside continuation whereas bears need not get too excited until we see a clear downside reversal day.
I discussed the technology sector in this column yesterday, but given the key breakout here is the chart again. Yesterday’s price action in the sector was one of sideways consolidation despite a few news stories that could have seen it dance in a more active fashion.
As technology companies are prone to particular volatility around earnings reports, I feel obligated to point to the following two charts. Both Microsoft (MSFT) and Oracle (ORCL) saw significant one-day haircuts/gap downs in their charts recently. Those long high beta technology names may thus want to consider taking profits ahead of the earnings avalanche.
All in all the rally in stocks year to date has been impressive to say the least. Seasoned traders and investors will take profits along the way while waiting for better entry points in either direction. As we head into earnings season I am doing just that. We are likely soon seeing more single stock volatility and a tighter book of positions will help to keep emotions at bay when the going gets fast next week.