There is excitement in the air. The mood in the media is exuberant as the media cannot stop about this joyous moment. Few of my friends who have no interest in the capital markets called me to confirm my positions. The above pic says it all. Was this rally due to real economic growth? Or was it due to FED's actions? I could care less about the reason. All it matters at the end of the day is banking coin in the portfolios. Hence, my earnest congratulations to the bulls who played this market rally! As soon as the market hits new highs, everytime a question crosses our minds. Is this the beginning or the end? Should we cash in our chips or should we push new money into the rally?
At our trading pits, we follow some important indicators to mark the market turns. One of them is bluechip stock GE. GE is one of the stocks that almost always shows signs of exhaustion (ahead of time) in market rallies as well as bottoms.
GE marked the top after almost every rally since 2003 in all time frames. My line in sand to be cautious was break of the Oct. top. That happened few weeks back was on not-so-good earnings number from GE. Since this market can simply run on fumes, I expected a vicious rally and that is exactly what happened. The market hit all time highs today on both the benchmark indices but one of our key leaders is struggling and has diverged from the market in the last few weeks. It indicates to me that leadership is diminishing, check AAPL, BAC, IBM etc. And, on a day like today when the market all time highs, I was surprised to see GE to print a big doji. There is high probability that GE is signalling to us the beginning of the end of the market rally, at least in the IT time frame and the rally from Nov. 2012 lows.
I would not jump to a conclusion right here and say I am shorting this market on a massive fashion. I am merely cautious here. Irrespective of how many indicators you have, you must realize that the price ultimately talks. I will be looking for 2 numbers 1, If GE can continue above 22.75$ and 2, if the market can continue above 1590 SPX.
Obviously if GE can push above 22.75$, there is no reason to doubt this rally. If GE cannot find its mojo to push above that line, I suggest you to be at the exit door. The previous high of SPX was 1597. That should be your typical market stop but given the ability of this market to run stops and shake us out, I will be wary to have a 10 point stop below that number.
Right now, I am a cautious bull. Market topping is a process. It will take some time for the market to end rallies like this. I will enjoy the gains as long as the rally continues but I will be very flexible to change my position and short it. The exit doors will be crowded, so there will not be time to get out of the market, if this is the end of the rally. So, don't expect others to manage your positions on a minute by minute time frame. Good luck!
p.s: I made a market top post days before the previous (Sept 2012) top. Based on my assumptions, we thought it was the end of the bull market from 2009. There were indications of exhaustion but I also gave hints on what would make this long term rally continue. As I expected, this market topped but only on the IT time frame and not on the LT. We shorted the market around Sept 2012 high but we also reversed our position in Nov. 2012.