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In my trading portfolio, I'm currently taking more risk on the long side than I've taken in months. I don't think we've bottomed out and started a bull market, trust me. I think that the market will end the year lower than where it stands today. Do not listen to those who say the worst is behind us. I think eventually we could see Dow 9,999. So what gives?
Stocks are in demand right now. Since May, investors have been dumping stocks like crazy, and the selling reached a point of exhaustion. Many shorts had to cover because of the Fannie / Freddie plan and some new government regulations targeting short selling. It doesn't really matter why for now, what matters is that some calm has been restored. This is what a bear market rally looks like.
Another sign that the rally could hold for a few weeks is that we continue to have bad news and the reaction isn't that bad. American Express (AXP) and Wachovia Bank (WB) reported terrible earnings, and yet the financials are up. Even Apple (AAPL), Google (GOOG), stocks that people love to love, have disappointed the street with their earnings reports--yet, the market is taking it in stride. (The drop in oil helps, but I consider that more of a red herring compared to stabilization in the banks.)
I said on July 17:
--Since August, we've had 4 rallies, documented in a previous post. During those rallies, the S&P 500 has gone up an average of 7.5% over an average period of 45 calendar days. The shortest rally was +4.3% over 28 days, the longest was +10.8% over 65 days. Remember that, when all seems well.
So, I'm playing this move with time and price in mind. When mid-August comes around, it'll be time to start getting defensive once again. Even now, I have skepticism and tight stops.
One last point: individual stocks are still quite dangerous due to earnings season. Even a decent report can send a solid stock down 10% (as I experienced with Gilead Sciences (GILD) last week). One way to play the rally but avoid this is to focus on ETFs. My picks:
* Biotech (IBB): One of the strongest sectors right now. It's not economically sensitive, and there's merger activity to boot.
* China (FXI): I like the FXI above clear support (at 120) with the Olympics on deck.
* Ultra Mid-cap (MVV): Mid-cap has been outperforming both the Dow and S&P.
Note: Article also posted on my personal blog, which charts and pictures!
Disclosure: Long IBB, FXI, MVV, GILD
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