After an already steep incline for 2013, the S&P 500 rallied another 3.5% off last Friday’s intraday bottom that came on the back of a weaker-than-expected jobs report. The prudent question to ponder at the current juncture, just days away from the thick of earnings season, is whether risk/reward is still juicy enough to hold or even add to long positions in the near term.
While the answer to that question largely depends on your risk profile and time horizon, in the interest of full disclosure, yours truly is happier with a marginal net-short position at present.
Given that price action is the ultimate and only arbiter, the marginal breakout in financials Thursday, coupled with the impressive footwork of the transports and the consumer discretionary sector, one must continue to respect the uptrend, even at these lofty levels — that is until it breaks.
The S&P 500 cozied up to the 1,600 mark midday, but within 3 points of a home run, took a little breather for the rest of the day. The move also lifted the index back to the upper end of the November uptrending channel, thereby worsening the risk/reward of the long side in the near term.
The iShares Russell 2000 Index (NYSE:IWM), while not breaking to new highs, did get within inches of its year-to-date highs and now sits against a nicely defined line of resistance. Very simply, a break above there would ask for upside continuation, whereas bears need not get too excited until we see a clear downside reversal day.
I discussed the technology sector in this column yesterday, but given the key breakout, here is the chart of the PowerShares QQQ (NASDAQ:QQQ). Thursday’s price action in the sector was one of sideways consolidation despite a few news stories that could have seen it dance in a more active fashion.
As technology companies are prone to particular volatility around earnings reports, I feel obligated to point to the following two charts.
Both Microsoft (NASDAQ:MSFT) and Oracle (NASDAQ:ORCL) saw significant one-day gap downs in their charts recently. Those long high-beta technology names may want to consider taking profits ahead of the earnings onslaught.
Conclusion: All in all, the rally in stocks year to date has been impressive, to say the least. Seasoned traders and investors will take profits along the way while waiting for better entry points in either direction. As we head into earnings season, I am doing just that. Soon we are likely to see more single-stock volatility and a tighter portfolio will help keep emotions at bay when the pace picks up next week.
Today’s Trading Landscape
To see a list of the companies reporting earnings today, click here.
For a list of this week’s economic reports due out, click here.