Friday, July 24, 2009

The Kirk Report

The Kirk Report

Up, Up, & Away

Posted: 24 Jul 2009 07:19 AM PDT

This was posted yesterday afternoon at the members' only area:

Yet another day of impressive upside action. All we need now is for earnings season to continue forever!

Dow: 10 Day View

I absolutely love days like this and it is not because I'm making money hand over first (as I'm clearly not) but rather I think I've finally found a solid edge (i.e. being short some unsustainable cherry-picked situations - see today's short screen for ideas). That's exciting to me even if these trades don't pan out quickly or even at all. (As you know from reading me, I can handle being wrong and will admit it without hesitation if that happens.)

From what I've been seeing out there, the S&P appears magnetized to S&P 1,000. In fact, given the current pace, we'll be at S&P 1100 before the end of next week. So I asked one of the more experienced traders who is very bullish within my mentorship circle to create a list of "things that could go wrong" for the market within the next few weeks. After asking why he should waste his time, he struggled to come up with anything beyond the typical stuff - i.e. market overbought and overdue for a sizable pullback, earnings don't really support the magnitude of the rally, when earnings season ends there are very few catalysts to drive the market higher, this move is based mostly on short-covering, and there is large-scale performance anxiety enabling stocks that go up big continue to go up big to "unsustainable" prices (at least over the short-term).

So, I ask you, what do you think can go wrong now in addition to all of these things?

This is exactly the kind of question that experience suggests that we all should be asking even if we don't want to. At the same point, those of us sidelined or short need to asking the exact opposite question - What is going to "continue to go right" for Mr. Market this summer and beyond?

As always, we all have to trade the market we see not the one we hope for or are positioned well to benefit from. Speaking of which, I will readily admit that the market sure feels and looks like it has in the past when it was coming out of a bear market bottom - i.e. fierce gains, no pullbacks to speak of, a false breakdown to shake out nervous longs before a major rally, every little dip is bought aggressively AND the growing perception and confidence that pullbacks will continue to be bought, no weakness even in severe overbought conditions, the return of M&A activity, historical research that shows that after periods of intense momentum like this that the market has a tendency to keep moving higher over various forward time-frames, today's Dow Theory confirmation (see IYT) and continued skepticism over the rally especially from those who also also aren't participating in the rally. Does that sound about right to you?

Beyond these market observations and opinions on both sides of the tape, please remember our task remains the same - to find and exploit low-risk, high-reward situations at all times. For the time being, I'm simply looking for AND finding more attractive setups on the short-side while having a more than a difficult time justifying being long or chasing stocks that have been up nearly every day since earnings season began and which don't offer what I think are good risk/reward setups now. But, that's just me.

Perhaps everything I know and have learned so far is wrong and the only risk out there is being short and sidelined and that chasing the market now is the way to untold riches. Frankly, I hope that is the case as I know far too many people who seriously need this market to rally significantly higher in order just to get back to where they were at this time last year. As an optimist at heart, I'd love for the bull market to return more than anything.

With that known, for me it simply comes down to where I can find opportunity. Maybe you are finding opportunities are plentiful on the long side and which you consider good risk/reward situations. That's ok. After all, that's what makes a market. But, you know where I stand, what I'm doing, and how important it is to keep an open mind considering both sides of this tape.

I can't wait to see what's next!