Macro Wrap – Market at Highs With Heightened Risk

by Enis March 6, 2013 7:22 am • Commentary

With indices breaking out to new highs yesterday, the main question for traders is, what now?  Do I just join the winners and start buying?  Do I try to fade the move as cross-market indicators and internals don’t look strong?  Do I sit on my hands?

I have been bearish for the past couple weeks, and I’ve been proven wrong.  In my experience, it’s best to step back a bit rather than force the issue.  Maybe that’s because I’ve had many prior failed attempts at forcing the issue.  Rather than try and surmise the market’s next move after a bad run, what I prefer to do in these situations is focus on single name setups that still make sense.  My DFS trade yesterday lined up well both technically and fundamentally, and it’s a directionally neutral trade on a stock that has not been very correlated to the broader market.

Of course, none of that changes the fact that I have a few losing put spreads on my hands.  I still see many macro warning signs that make me skeptical about the nature of the current rally.  But I don’t want to throw good money after bad, so I’m not keen on adding any premium on the bearish side.  However, for my current losers, I am willing to be more patient rather than cut them in a panic since the warning signs still exist.  Moreover, the premium has been reduced quite a bit, to the point where when I weigh the risk/reward of holding vs. cutting here, I prefer to hold.

For now, patience is my watch word.

Markets overnight:

  • Asia followed the U.S. into the green, with every major market higher, once again led by Japan, up 2%.  
  • European stocks higher as well, with the German DAX and French CAC hitting multiyear highs.  Notable though that European banks continue to lag.
  • SPX futures 0.25% higher, the dollar flat, and bonds and commodities a bit lower.
  • ADP Employment Change at 8:15 am EST, with expectations for 170k after 192k last month.  Fed Beige Book released at 2:00 pm.