The Outlook Remains Bearish


January 10, 2013 (11:00 am)

The market got a boost this morning with better than expected trade data out of China; however, it fell far short of making a decisive new high. For that reason, we’re sticking with our bearish outlook for the intermediate-term. We took profits on our near-term options in the Multi-Strategy Portfolio (we sold our HOT and SODA February puts for 30% and 7% returns, respectively) in order to push out our nearest options expiration to March. This should give us plenty of time to see our thesis prove out. While our expectation for a reversal in the broader markets remains strong, we don’t want to get into a situation where theta decay (the time value priced into the options) affects our positions. Allowing over two months for a reversal is the prudent path. We are also OK sitting in our short positions until the anticipated reversal comes to fruition.

We should note, though, that we continue to challenge our thesis. We are constantly looking for new information and analysis that disproves our thinking. If our conviction diminishes, we will not hesitate to get out of losing positions.

SPY (S&P500 Index)

The SPY formed a new high with the gap up this morning, but as we discussed above, it didn’t break decisively above the previous high set early last week. With the subsequent decline through the early morning, it’s starting to look like a double top. Interestingly, the target price of a double top reversal here is very close to the gap fill from the “fiscal cliff rally”. Whether it turns out to be a double top or not, this attempt to rally and lack of follow-through is not what bulls want to see here.

SPY

Broadcom. We took a short position in BRCM this morning as it failed to reach the upper trend line of a rising wedge it has formed since early November. You can also see buying momentum slowing, as it reached the exact same top ($35) from early January on a lower RSI. This could also be a double top in the forming.

BRCM

Chipotle. To update our CMG analysis from yesterday (we took a short position as it broke below its lower trend line), the shares rallied briefly this morning. This rally brought the shares back up to the lower trend line, but it again failed at that point. This is fairly typical price action. You often see a re-test of a trend line after the shares break it to the upside or the downside.

CMG

Gold ETF. GLD is on our watch list. It has been forming a falling wedge since early November and is now reaching the upper trend line just as it enters overbought conditions. We may take a bearish position on a failure here, or conversely, a bullish position if it decisively breaks through to the upside. Either way, we’ll be watching this closely.

GLD

Google. We took a short position in GOOG this morning as it reached the upper trend line of a rising wedge it has formed. The shares created negative divergence, rising to a higher price on decreasing buying momentum.

GOOG

Netflix. This is something we’re watching for now. NFLX is bouncing off the lower trend line of a well-defined rising wedge. We’re looking to take a bearish position on a breakdown.

NFLX