Since the S&P500 definitively broke support in the 1,250's in early August of 2011 every rally approaching that key level has been repelled, often violently. The result was the choppy, brutal, ugly and ultimately pointless gyrations resulting in a lost year for stocks.
After the bullish rush of early 2012, here we are again, attempting to stay above 1,260 and stay there. J.C. Parets, founder of AllStarCharts.com, isn't so sure this time is any different. Describing the aforementioned breakdown of last summer as "devastating for U.S. equities," Parets is taking a "show-me" approach to the tape, looking for a consolidation of the December and early January gains, for starters.
And what he really wants to see is sector rotation. The broader tape isn't going to make any substantive progress unless the "risk-on" sectors start leading the way higher. Energy (XLE), Industrials (XLI), and the Basic materials (XLB) that typically move higher in robust economic times need to show some positive price action for Parets to embrace a breakout.
If the tape manages to move higher without those groups leading, Parets is casting a furtive eye towards the much hyped 1,350 target level, a mere 6 or 7% higher than where we closed 2011. The strategist isn't suggesting a flat-out move to the sidelines, but simply trading smaller and erring on the side of caution.
No matter what you see on TV, there is a middle ground between Bullish and Bearish. In environments such as this, Parets' advice is simple: "Trade smaller, you don't have to be all in at all times." Take partial positions and get your arms around the tenor of the tape; simple advice you don't hear very often, to the detriment of our all or nothing investment attitude.
It's exactly the strategy I've been using for months under the label "long-ish" but that doesn't make it right for everyone. I want to hear how you're playing it; drop me a Tweet at @jeffmacke or comment in the space below.