Yell and Roar, but Sell Some More - 06/21/10

The time to have bought was a month ago, when many were fearful with the S&P 500 at 1,050-1,060. I would be a seller into the breakout based on a matched risk and reward for the S&P 500 for the next several months. I don't see enough upside to the fundamentals of our economy; nor do I see enough marginal buy interest.

With an assist from a Chinese currency adjustment, futures indicate that U.S. equities are poised to break out of technical resistance.

No doubt many technically inclined observers will be ecstatic and uber bullish this morning.

From my perch, however, the time to have bought was a month ago -- with the S&P 500 at 1,050-1,060, fear was the friend of the rational buyer. At that time, many on RealMoolah and elsewhere were fearful of the European contagion and of the possibility of a weaker-than-expected domestic economy in the face of tepid jobs growth.

In the face of that uncertainty, it was hard to buy then -- just as it might be hard to sell/short now.

Nevertheless, I would be a seller into the breakout based on a generally matched risk and reward for the S&P 500 (1,050 on the low side, 1,180 on the upside) for the next several months.

I don't see enough upside to the fundamentals of our economy. Nor do I see enough marginal buy interest -- retail investors can't be expected to play aggressively, mutual funds are fully invested, and hedge funds remain a question mark to propel stocks higher in a period of economic uncertainty and multiple contraction. As I mentioned, hedge fund field positioning into the end of the second quarter will be the primary influence on the sustainability of this morning's (and last week's) advance, but with the oscillator moving into overbought (see the Divine Ms. M.'s opening missive today), this represents another headwind for stocks.

Finally, recent history of how markets respond to a Chinese float doesn't have to be repeated, but it shouldn't be ignored. Back in 2005 (the last time China moved to a managed float), the least affected asset class was U.S. equities. Stocks dropped by about 4% in the next three months and were basically unchanged in the 12-month period. Two years later, stocks were up by 25%, but that was abetted by very strong economic headwinds.