Fund Manager Battle Ends in a Harami Day

I keep getting conflicting reports from fund managers over the government actions, the economy, and the financials. It's been quite a while since I have seen such a disagreement over the market, and the conflict is only getting more interesting.

There are some fundies, like Mark Mobius, who are insisting the market is on the verge of a new macro bull. There are other fundies, like Bill Dinning, who are not convinced the government actions have really set the table for a new macro bull. The two camps are pretty divided, and it's interesting to see how the division is defined. I've been explaining some clues about this in VC, and I have been teaching many of you insights into what may be happening over the course of the past several months and longer. It appears that hedge fund managers are net buyers the past 4-5 weeks, while mutual fund managers are still net sellers in the same time period. In addition, I have shown you the explosive growth in the hedge fund industry, and likely demographic of many hedge fund managers. The bottom line is that not all Big Money is Smart Money, and the gene pool has been highly diluted. The hedge fund industry has taken a big hit in the past year as some of that big, but not necessarily smart money gets compressed out of the market, like it usually does.

There is another element to this game, and it has to do with political ideology amongst the fund managers. I won't go into detail on what I think is going on because it is such a sensitive subject with so many people, but it is even more fascinating to watch, and potentially much more dangerous to the market than the first phenomenon of "big, but not always smart" money. I call the second phenomenon (for now) the "actions, but not the consequences" money. I hope that I never have to go into detail on what a danger they pose to America, because if I do, it will be as a last resort to do some small thing on my part to counter what would be the end of our freedom as a country.

As for the market today, you will notice this is the biggest morning gap down since the upswing began. The tug of war between the smart money and the "not so smart" money (there, now wasn't that all politically correct of me.....), is going back and forth.

I'll switch the analogy and description a bit here so I can be even more politically correct. The market is fighting to decide whether or not the current extreme upward trend-swing completely erases the extreme downward trend-swing from February. The price action the past month has been sharp to say the least. I won't count out the upswing just yet, but the gap down this morning has me on notice.

8:35 am - 8:55 am MT: Intra-day Update: I'm starting to get a feel for the price action and the minds of the fundies. The market has been bullish the past two weeks thanks to the News Bogey Gauntlet from the government and the banks. Many fundies bought it all the way, many fundies did not. The fundies that did participate in the market the past couple of weeks were net buyers. In addition, there was a lot of short covering that exacerbated the move. The gap down this morning was not driven by any news. It appears that the Energy, Commodity, and Financial sectors are seeing some compression this morning, especially Energy and Commodities.

Now, think about what I have been teaching you. Energy and Commodities can not lead a bull market. Rising oil prices will put a lid on any recovery, especially in the delicate economic environment we are experiencing.

The reason Energy and Commodity stocks were one of the big leaders in the recent rally is because of cult trading and short covering. Think of Tech stocks in the run up in 1998 - 2000, and then the residual "remorse cult trading" in mid 2000 - 2002 as all the Top Gun Traders kept buying tech all the way into the ground. Energy and Commodity stocks of 2005 - 2008 were the new Tech stocks. Those sectors had such a dramatic drop in 2008, and are so crispy right now, that many Top Gun Traders are scrambling to grab as much of the kool-aid as they can in hopes of putting life back in their lifestyle.

This looks so similar to the Tech stock cult trading phenomon because of the type of traders that still exist in the market. It's even possible that the Top Gun Traders may be right, and Energy and Commodity stocks are due for a strong counter move, and a solid uptrend for several months (because of the perception that the sectors are so oversold). However, with the price of oil jumping to $54 yesterday on just the beginning of a counter move, the question becomes, how much further will the price of oil rise if the Energy sector does take off? Will we see $75, or perhaps $100 again? This is exactly what I've been talking about when I say that Energy and Commodity stocks can not lead a bull market. The scary scenario is the government deciding to continue manipulating the financial market without a comprehensive energy policy in place, and then knee-jerking into price controls in order to try to force an alternative consequence to their own actions.

9:00 am MT: The market looks like a consolidation day today. I speculate we will see more of a Harami type of pattern today. I think there are still enough fundies out there who will try to buy dips. And I think it's pretty obvious (with this morning's gap down) that there are also enough fundies out there who can reason through the current Financial sector conditions and the problems with Energy stocks leading the rally (just as I've been posting all morning), that the market will sell a bit when the buyers make a push. The net price action today looks like a balance between the frenetic fundies and the realistic fundies. I think we will see more consolidation today, but not necessarily a sell-off. And I thik that any spurts of buying will be met with the new group of fundies who entered the market this morning to sell stocks.

Aren't you glad you are making it a practise not to hold major positions overnight?

9:07 am MT: Intra-day Update: If we do get a test of yesterday's highs, it will start right here. If you are still in a mood to try a little call trade, this is the time. The first resistance on the SPX is going to be 818, and then 823. I'm not that enthusiastic about the price action, so if you do something right now, do it very small. I'm also not that enthusiastic about buying puts because of the plethora of fundies who are still googly-eyed over all the kool-aid they've been fed the past two weeks.

9:15 am MT: Here is a current 10m chart of the SPX showing a potential Double Bottom Base:
(click on image to enlarge)

Here is a current 30m chart of the SPX showing a potential Bull Flag:
(click on image to enlarge)

The market is probably going to make a push right here, but I think the push will not be energetic and frenetic like yesterday. The market has a sense of hesitation to it today. Perhaps it's gathering energy for another move. Perhaps the frenetic fundies are hoping for another government news bogey to force even more short-covering. Or perhaps the mutual fund managers are stepping in to sell a little bit of stock on the recent run-up. I don't think anything dramatic is going to happen in the market for awhile, and perhaps all day. That's why I speculate we may see a Harami type of day today.

9:30 am MT: Well, there's the push, and so far, it's just as advertised.....which is nothing to write home about.....

10:00 am MT: The little push rolled over, which ads to my speculation that this will be a Harami type of day. It's worth watching for a while longer to see if anything starts forming, but don't knock yourself out trying to analyze every tick of the chart today. Maybe something will happen, but I'm not going to hold my breath over every little move.

10:15 am MT: The market had such a big move yesterday, and such a steep upswing the past two weeks that it's probably headed for a bit of consolidation. If you look at the price action on the 19th and 20th (last Thursday and Friday) you get a feel for what the market may be headed for today. You can see the consolidation a bit easier on the 30m charts.

Here is the current 30m chart of the SPX with the previous consolidation channel highlighted in blue:
(click on image to enlarge)

You can see the 30m chart already doubling back off the attempted bounce that I posted earlier. If we get a consolidation similar to the 19th - 20th, then when it resolves and continues, the market may take another leg up to 850. If the market tries to reach for the beach right now, then this swing will probably exhaust itself in the 825 - 830 area. And if the market drops below 790, then the consolidation on the 30's could lead to a pullback or roll-over on the daily charts. We'll see how this all forms up in the next little while. There may still be some call trades today, so again, it's worth watching, and perhaps doing a little trade here or there, especially knowing that there's still a chance that the frenetic traders are hovering their fingers over the panic buy button. But if the market doesn't pick up any momentum in the next couple of hours, then expect more of a Harami typ of day and give you eyes a rest. The next push will probably come right now, so we'll see how far this one goes.

12:20 am MT: The next push is still fussing along, but it looks like it's getting ready to consolidate again after hitting yesterday's high. So there was a little call trade in there, as I speculated, but the day still looks like a Harami or narrow range day (which isn't that much of a stretch considering how wide the range was yesterday).

1:00 pm MT: The market did consolidate shortly after I warned. These little ebbs and flows are only worth a casual glance at this point, just to see how things close. Give your eyes a rest, especially if you've already locked some good trades in today.

6:30 pm MT: Market Wrap: The SPX finished with a Harami, which was what I was looking for all day.

I'll get an early jump on tomorrow since I don't know how much I will be able to post pre-market. The Harami on the SPX could end up being part of an orderly mini-consolidation. However, an inside view of the 2hr charts shows the beginnings of a pullback that could go as deep as 785, with some wiggle in the 800 area first. I still think the upswing won't end without a fight due to the googly-eyed frenetic fundies, so we may see some type of Double Top before we see 785. Any drop below 785 and the upswing is likely over.

Here is the Daily chart of the SPX showing the Harami:
(click on image to enlarge)

Here is the 2hr chart of the SPX showing the Pullback starting:
(click on image to enlarge)

I will update again in the morning, but these are the charts to reference for tomorrow.