Don’t Blindly Buy Overbought, Light Volume Market Into Labor Day

US stock futures point to a higher open Wednesday morning back up near yesterday’s high. In the last 15 minutes of yesterday’s session we saw a steep sell-off that continued after the bell, which gave bulls some jitters. The market weathered an extremely weak consumer confidence number, with investors not paying too much heed to the number that was taken during the market turmoil in early August.

The catalyst for the afternoon market surge was the Fed minutes from their latest meeting, which many believed laid the groundwork for QE3. The next step would be maturity extension unless we see further deterioration in economic data. Commodities, stocks and bonds all surged after the minutes, which tells that many now expect QE3.

While it may be tempting to start buying macro positions at this stage with the expectation of QE3 growing, stocks are extremely overbought at these levels. This is a tricky area where it is difficult to find an edge. On one hand we have room technically to retest 1250 on the S&P, but short-term we are extremely overbought. While short squeezes can go longer, and quicker, than you think, with a low volume holiday week in store, it is a time to pare back trading.

Gold has quickly erased most of its two-day pullback from last week, and is looking like it will get back to record highs again soon. Even just the expectation of QE3 right now should send gold on another run. However, with how far gold is extended, you are prone to experience harsh pull-backs like we saw last week. What happens when the safe haven trade is no longer safe? Gold is often hard to trade short term, so if you want to have gold as part of your long-term portfolio, look to buy pullback and be in for the long-haul. This COULD be a case where you don’t want to buy the excitement of QE3 on gold, so stand pat for now and see how this trades turns out.

Big cap tech has been the place to be again in the market. Former leading stocks resuming their strength is a positive sign for the market as a whole, as it shows investors are willing to put some risk back at this stage. Apple Inc. (AAPL) has been the cream of the crop since the resignation of Steve Jobs. Many expected a Steve Jobs crash when the visionary CEO quit or died, but the sell-off was mild and his departure has instead lifted the cloud of uncertainty that was hanging over the company and stock. Expect AAPL, which remains heavily undervalued, to make all-time highs over the next month.

Other stocks in the group breaking downtrends are Baidu.com Inc. (BIDU), which bottom after the CCTV investigation into possible fraud. It was a case of sell the rumor, buy the news, and it looks ripe for higher prices. Netflix, Inc. (NFLX) finally saw the harsh sell-off many had been betting on for some time in the stock, but is breaking out of its steep downtrend. It certainly has room to retrace.

Overall, volume has been paltry this week and don’t expect that to change. We are following a major hurricane in the Northeast, and we have Labor Day weekend coming up. This is the ultimate “sit-on-your-hands” time of the market. Mixed signals short term, and low volume.

By: John Darsie

Disclosure: Evan Lazarus has no relevant positions

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