The major indices sprinted higher yesterday on reports of an imminent German led bailout of Greece. The highs of the day were right at the underside of the down sloping 10 day averages on both the S&P 500 (1070.52) and Nasdaq (2150.87) Rallies in Down trends are opportunities to reduce long side exposure and this is no different. We suspect there will be some sort of EU agreement to aid Greece under certain budget requirements that don’t violate the so-called moral hazard issue; but the larger question of unsustainable debt will still remain. The bears still have the upper hand despite yesterday’s rally and there are twice as many stocks below their 50 day average as above it. We continue to focus on a potential move down to the 200 day averages - currently 1022 on the S&P 500 and 2028 on the Nasdaq - as the most likely near term scenario. This would bring us back to levels we reached last August well before the stellar earnings results of the 3rd and 4th quarters, and the double digit correction, in our view, would provide a tremendous buy set up. Ultimately earnings drive stocks, and estimates continue to rise. Merrill Lynch just increased its earnings estimate for the S&P 500 for 2011 to $85. We are presently at 12.6x that estimate for a forward earnings yield of almost 8%, or more than twice that of the 10 Yr treasury! Of course, we have significant headwinds in terms of spiraling deficits, the need to remove the monetary and stimulus punch bowl, as well as possible contagion issues in Europe. But nonetheless stocks are extremely cheap and if a manageable drawdown of these pressures can be orchestrated over the next couple of years, then we see no reason why the S&P 500 won’t make a complete “v” back to the top of the secular bear range. We have learned that so long as the 10 week moving average on the S&P 500 remains above the 50 week, it pays to give the bull the benefit of the doubt. What we are seeing presently is just a normal correction in an ongoing bull market, just as we saw continually throughout 2004-2007. During those years, whenever we saw the first Ts indicator fall below 0.25 and give an O/S/UP signal, it proved to be a great time to pick up the pieces. We suspect we are setting up for something similar right now, and while we are cautious in the very near term, we are hopeful we can get our shopping lists ready for a test of the 200 day averages.


S&P 500 (1070.52) ran right into the 10 day average at 1079 yesterday before backing off into the close. The 1083 level is critical near term in that not only was it the bottom of the previous three month range but is also 180 Gann degrees down from the closing high. While a move and close above 1083 would be bullish and a signal that a potential reversal is about to play out, the down sloping 20 day (which has just crossed below the 50 day) provides significant resistance into the 1090’s. All in all this looks like a chart to be avoided and rallies like we have seen back to the down sloping 10 day averages are opportunities to step aside. A move below 1061 would suggest accelerated selling pressure. Longer term we are looking for a potential test of the 200 day (currently 1022) if not a full 360 Gann degree move down to 1019.


Nasdaq (2150.87) we said that initial resistance would be the down sloping 10 day average at 2166 yesterday and that marked the exact high of the session. Today it comes into play at 2158. Any move above 2158/2166 might suggest further near term upside, but this is still a chart that is broken and the specter of a rapidly declining 20 day average looms just above. Any break below 2132 would suggest accelerated selling pressure. Our main defense has been to write calls and in particular NDX calls. This means the position gets increasingly short on rallies as the delta of the naked option increases. As such we more likely to sell more calls into weakness, and this is especially true if we feel we start to rollover below yesterday mornings pullback low at 2132.