Dow Leaps 273, Bottom In?

Thursday, June 10, 2010

The market launched itself 273 points higher today trapping and punishing shorts who were too early to jump in during yesterday's afternoon collapse following the Fed's Beige Book release. Luckily, I was smart enough to begin buying the SPY at nearly the dead lows on Wednesday and found myself nicely in the money today. I was an aggressive buyer just above $105 on Wednesday and sold 3/4 of my position into the close but held on for a swing with the last portion. Spending two days off the trading floor, I simply watched from a distance and believed we would see much more upside in the market. I was surprised by yesterday's sell-off but it seemed like weak hands bailing and early shorts piling in and just did not feel like a real move.

Today, I was rewarded with over 40 handles of gain in the S&P 500 and reduced my position to a feeler at $109 before today's close. This is the first solidly profitable trade I have made on the long side in a while but I was pleased with the sheer perfection of my buy point. It is yet to be seen whether this is in fact the low of this correction and the bottom is in. Technically, it looks like a solid bottoming formation but we'll see. I am awaiting a break of the descending trendline and a higher low to gain conviction. Hopefully I'll be smart enough to add back into a substantial long position and look for more significant upside.

I also added to my long position in FXI on Wednesday. The Chinese stock market is looking great after months and months of consolidation. The FXI is trading at exactly the same price it was one year ago today, in June 2009. As I wrote up in an earlier post, the People's Bank of China has been consistently tightening in order to cool down the heating property market and equities have been stalled for a year now. I have long wanted to be a buyer of Asian markets and now seems like a prime time to become an investor. I like to be a buyer into stocks and markets that have consolidated for a good deal of time. China looks like an obvious choice as the economy continues cruising along at a 9% growth rate with less than 5% inflation and over $2 trillion in foreign exchange reserves. Should the economy slow beyond what is desired the government has extraordinary flexibility to spend out of its reserves and jump-start growth. In fact, China spending its reserves could be the answer to reversing the global slowdown. Just as an anecdote, China is currently building 110 miles of highway a day, just incredible infrastructure investment and more of this will help fuel the global turnaround. Coupled with the strong economic backdrop, the regulatory restrictions within the country belie any concerns of a capital flight out due to any political situation that would arise. I cannot be sure if my timing is right but the technical picture has given me an area to become involved. I am long FXI at $38 and looking for a significant move to the upside.

Disclosure: Long SPY, FXI.
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