"If a tree falls in the forest and no one is there to hear it, does it make a sound?"
To most traders the answer to this age-old philosophical riddle is along the lines of, "If a hippie asked me a stupid question would I bother to answer?" No. No I would not. Or perhaps I'd have a blank stare of total disinterest; one of the two. But if you pulled a trader off a Manhattan trading desk this summer and asked him if a technical level like the S&P 500 hitting 1,250 can be relevant, now that the whole planet is watching for it, you'd twist his mind.
On the one hand, it's bullish when you know you have institutional and retail investors seemingly waiting to buy along side you at a certain level. The more people buying stocks at once, the more likely it is that a level will hold. Then again if the whole world is looking for a bottom at 1,250 big money (all those "buy dip" people) would already be front-running the trade, making it impossible for the market to get to 1,250 in the first place.
I'm blowing my own mind with this topic which makes it a good idea for me to segue into Josh Brown of TheReformedBroker.com. Brown's a savvy guy and Breakout veteran so I just threw him the 1,250 conundrum right off the bat.
Here's how Brown laid out his thinking,"because so much money is run by... technical analysis it (1,250) almost becomes self-fulfilling" he offered, easing into the topic as one would a groovy hot tub. Quickly composing himself, Brown listed a menu of reasons 1,250 does, in fact, matter.
First of all, 1,250 is the 200-day moving average (traders watch moving averages... don't ask why, they just do). Second, it's where the market started the year as well as in the area of the lows in response to Japan's earthquake tragedy in March. Essentially, if stocks are going to find support, 1,250 is where it "should" happen. "It's helpful to have a sense of where the numbers might be," concludes Brown.
What the Reformed Broker is doing now is sitting on the cash he raised by doing some selling last month and making a list of stocks he's "stalking." As for when precisely it'll be time to get off the metaphorical couch and start buying Brown is going to step back and see what happens when the S&P simply accepts its fate and takes back the gains of 2011. Exactly when an investor goes from "hiding in cash" to "buying up value plays" is a matter of personal style.
In terms of sectors, Brown has been rotating from momentum to more stodgy plays involving "dividends" and other such value-related traits. One vehement exception: financial stocks. "Banks are just atrocious... way under-performing." He adds that the news flow is horrendous, the sector has regulatory overhang, and banks are actually losing incremental regulatory battles in Congress for the first time since pretty much the second Roosevelt administration. Oh yeah, there are also lay-offs happening which doesn't suggest recovery according to Brown.
Beyond his loathing of financial stocks the amiable ex-broker is taking it as they come, hitting 'em where they ain't, playing it as it lies and anything else one may do while killing time in anticipation of a big event. In this case the event is S&P 1,250. Until then this is a great time to invite your favorite trader, reformed broker or fund manager out for a round of golf and a beer.
- S&P 500
- moving average
- Roosevelt administration
- technical analysis