How Will the Market's Garden Grow?

July 25, 2016

Mish's Daily

By Mish Schneider


2 years ago, rabbits ate every single one of my tomatoes before they could ripen. Last year I lost all my tomatoes to a beetle infestation. This year, my vegetable garden thrives. The cherry tomatoes have already yielded many succulent red tomatoes. Hence, for the first time, I can observe how in the proper conditions, unobstructed tomatoes actually grow.

In clusters, on a vine, ripening at different times.

The Russell 2000, now 10 days in consolidation, has the tightest trading range (around 1.36%) since December 2012 and December 2010. If we liken this to a clustering vine, barring some obstruction, we can surmise that additional ripened fruit for the picking is only a few days away.

This current trading range or price cluster if you will, has already given us matured fruit. After all, the Dow has rallied four weeks in a row. The S&P 500 (and the Dow) went to new all-time highs.

Even so, besides the Russell’s, the SPY DIA and more recently NASDAQ all have tight trading ranges.

It is during peak growing season we must make choices. Do we assume everything will be fine and let the positions ripen further or do we pluck the ones that have partially ripened just in case?

If our choice is the former, it is partly because we feel we have some control over creating a good growing environment. Each day, we carefully inspect each index, sector and individual stocks to make certain that none have experienced a nasty encounter with any rodents or insects. If they haven’t, we move up stops and patiently wait for the market to continue to ripen and feed us.

If we make the latter decision it is partly because we see a shift in the growing environment. That might look like bad earnings, geo-political events, a sudden shift in central bank policy or just general uncertainty creeping back in.

With the latter, we can opt to run with our semi-matured profits and at least get some satisfaction from the fruits of our labor. Even so, when the market trades in a range as tight as the current one’s, risk remains.

Sector Rotation and Diversification

I am also growing several other vegetables simultaneously. With an abundance of basil, I have made enough pesto sauce to last for months. Should an insect devour the rest, I am ok.

Given the consolidation pattern that the indices are trading within, it is equally good to establish that if one area of the market is already moving abundantly, lock in profits. Then, you can calmly and patiently wait to see if the other slower growing areas can catch up.

To protect yourself further, have positions on in different asset classes. Rabbits may eat your tomatoes but they may not eat your chili peppers.

As in nature, conditions always loom that are beyond our control. If you cannot handle the unknown, you can stay away from gardening all together. Presently, investor cash on the sidelines proves that many have made that decision. I don’t recommend that however.

I love gardening. I love trading. I know the risks of both. This consolidation will resolve. An experienced gardener and a practiced trader is prepared for whichever way that is.

S&P 500 (SPY) 215.80 the 10 DMA closest support

Russell 2000 (IWM) Inside day. Consolidation pattern persists.

Dow (DIA) 187 a target if 183.80 holds

Nasdaq (QQQ) Inside day. 115 next resistance Support 112

XLF (Financials) 23.60 pivotal. Consolidating

KRE (Regional Banks) Must end this week over 40.40 to change longer term trend to up

SMH (Semiconductors) New high close

IYT (Transportation) Inside day. 143 pivotal and over 147 game changer

IBB (Biotechnology) Should hold 273.25 if good now and at some point clear 287

XRT (Retail) Strong day over consolidation. Must now clear 45.80 for the month to be a game changer

IYR (Real Estate) 84 support

ITB (US Home Construction) Continues to Consolidate

GLD (Gold Trust) 125 great support to hold

SLV (Silver) 18.35 support. Still bullish. Over 19.05 looks good

GDX (Gold Miners) 26.45 the 50 DMA to watch now

USO (US Oil Fund) 9.80 key support. If gaps open above 10.11 should bring in buying

OIH (Oil Services) Good low risk buy now against the 200 DMA

TAN (Guggenheim Solar Energy) Like to see this clear 22. 21.20 support

TLT (iShares 20+ Year Treasuries) Fed meeting this week. Still in a bullish phase

UUP (Dollar Bull) 25.06 pivotal support

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