On Being Way Too Cautious

 | May 24, 2013 | 5:00 PM EDT
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Let's get this out of the way. I blew it. I have, admittedly, been way too cautious on the market. After buying into the mid April pullback I began scaling back in my positions much too soon.

I was looking for the prior highs in the SPX at 1597 to stall the market again, and though that area marked the highs for a few days from late April to May 2, it ultimately gave way, and, by May 3 it was up, up and away. The market blasted through that level and never looked back, till now that is.

I have remained net long, but only up to about 30% invested levels. I am using this pullback to add to my positions, not only at Rydex (now Guggenheim Investments) but for my option accounts as well. Moments ago, with the SPX at 1641, I returned my mutual fund accounts to a maximum of 40% invested.

Here's the story. The SPX which topped out earlier this week on Wednesday at the 1687 level plunged more than 50 points into yesterday's lows. That's a 3% reversal in a little more than a day. That's a pretty good pullback in my book and I only buy weakness so here I am with an opportunity to reestablish some positions. So that's what I am doing. On the technical front, I like the fact that, this morning, at least as of 10:30 a.m., the SPX is holding above that low.


Granted, there are lower downside targets, as in downside gaps which remain unfilled. The closest one is from May 14, which only shows up in the e-mini at 1630.75 (it doesn't show up in the cash, but, if it did, it would be at the 1633.77 level). If that level is seen, I will add further to my positions. Below that, a long way down, in the area of the prior highs is the gap at 1597.59 from the launch on May 3. I won't hold my breath for that one, but if it is seen, you can bet I'll be buying there.

Speaking of downside gaps, it's noteworthy that, at least in the Russell 2000 (^RUT), the May 14 gap at the 973.79 level did get filled on this drop. I like that, too. Though I am not currently adding to my positions as that index is still a little too extended at current levels.


The Emerging Markets Index (EEM), has continued to lag this move, and in my book that makes it an attractive candidate for buying and for writing puts. Not only has this index gotten slammed over the past few days, back to levels not seen since April 23, but it remains in negative territory for 2013. So, I am buying this index and writing puts on it at current levels.


As for the indicators, they are looking much better to me now. The McClellan Oscillator is back to a mildly oversold reading of -108 and that was at yesterday's close. It should be more oversold today.

On the sentiment front I am encouraged that the VIX (^VIX) has popped above 15, back to its highest reading since April 22.


And then there's the seasonal issue. Positive for the short term as the days immediately following Memorial Day are generally positive. I suspect that this year will be no different. 

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