Expect Uncertainty

 | Aug 19, 2011 | 9:28 AM EDT  | Comments
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Stock quotes in this article:

cmcsa

,

azo

,

lulu

With another sunrise comes another 20-handle pullback on the S&P 500. Is the world ending?

I'm no Nostradamus, but I do know this: If you're trading small, as I recommended in last week's column, "Rough Sea? Here's Some Dramamine," you still have plenty of dry powder. When volatility rises, we trade small to compensate for bigger market moves.

If my entry points from Thursday's column, "Buy When They Cry," seemed a bit too conservative, now you know why. Small positions and multiple entries, spread out wide, will serve us well as we navigate this stormy market.

Yesterday's entry points are still valid, with slight adjustments. I still like AutoZone (AZO) on its 200-day moving average, which is now $272.75, and I still want to buy Comcast (CMCSA) on its trendline support of $19.50. Perhaps today we will get our chance.

We did manage to pick up a small position in Lululemon (LULU) yesterday, a little above $48 as recommended in Thursday's column. After a big gap lower, LULU stabilized in that area for most of the day, and even ended the trading day right at $48.

Source: TradeStation

I liked LULU at that price because of its daily trendline, which has been intact for the entire year -- at least until today. Now that the futures are down again and LULU is offered lower in premarket trading, I'm hoping to be filled on my next entry point, which is the 200-day moving average of $42.65.

Source: TradeStation

A fill at that price would give me an average entry of about $45.50, which is nearly a 30% discount from the stock's all-time intraday high of $64.49. That high occurred less than one month ago, on July 20.

That's my LULU game plan in the event that yesterday's sell-off continues. But what if it doesn't? What if we have a snap-back, "rip your face off rally" before the close of trading today? What if the Fed calls an emergency meeting? If so, I'm sure I'll be tempted to close LULU at $52 if I get the chance. If you look again at the intraday chart, that's the point at which yesterday's gap lower will have been filled. (I'm scheduled to discuss this stock and others on CNBC this afternoon between 2 p.m. and 3 p.m.)

What's really going on here? A perfect storm of negative events has formed and is swirling on the horizon. Europe is like a car with multiple steering wheels, careening down a highway. Nobody knows what European Central Bank President Jean-Claude Trichet, "Merkozy," or any of this cast of characters will do next. Will they eventually issue European bonds? This week, the answer is no. But will there be yet another emergency meeting, yet another change in direction? Nobody knows what to expect.

The Fed's multiple stimulus plans not only failed to create jobs, they created distortions in the marketplace, and now that quantitative easing has ended, some of those distortions are unwinding. By pumping money into the system, the Fed inflated the stock markets. For now, the pump is dry.

Even within the Fed, the voices of dissent are loud and clear. Charles Plosser, president of the Philly Fed, this week called the Fed's recent promise to keep rates low until mid-2013 "inappropriate policy at an inappropriate time." Last night, Richard Fisher, president of the Dallas Fed, pointed out that adding fuel to the economy will not solve the problem.

"We have filled the gas tank. We got lots of fuel in there. Someone needs to step on the pedal," he told CNBC's Larry Kudlow.

Will there be QE3, or perhaps an emergency meeting of the Fed this weekend? Nobody knows. If this experience has taught us anything, it's that governments and central bankers cannot solve all of our problems.

That, and expect the unexpected.

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