Cash is King in Heavy Market

There is a storm brewing in the market right now, and over the last few days we have definitely heard some thunder and lightening! While bulls have been holding out hope that the economic recovery would take hold, the numbers are starting to get worse. Yesterday’s ISM survey was the worst in 2 years, and last month’s jobs report was dismal. If the pattern holds true, Friday’s jobs number can be expected to disappoint as well.

This poor fundamental data combined with the weak technical action even despite a debt deal in Congress leads me to believe that this head and shoulders pattern can actually trigger. On Wednesday July 28th, I mentioned that IBD put the big picture back in a “correction” and if you follow their rules (and mine), you would have been in mostly cash around 1310-1315. Yesterday was a very bearish engulfing day. Opening up 15 handles and giving it all back (and more) is a another bearish technical signal.

We have been dancing around the 200 day moving average the last two days and this morning we are opening comfortably below. This market needs to re-group quick this morning and take back the 200 day otherwise selling can intensify. Just in case you forgot, there is no more QE2 and no more Plunge Protection Team, so the “fix” that has been in over the last year or so that has saved this market every time it was ready to break down, might not save the day. I’m not trying to “scare” anyone, I’m just calling it like I see it, and I don’t want anyone to be stubborn in either direction. It’s hard to be short as the S&P’s have been down 7 days in a row and now we are working on number eight, but this environment is very bearish.

This market can’t hang its hat on 10 or so great acting stocks, and they might even correct a bit if this market sell-off intensifies. If weakness persists, even these relatively strong stocks can break down. There is no reason to carry excessive risk right now. We will see a new rally set up at some point. We haven’t even seen day one to start the process.

People ask where can I put my money in the market when we are in “correction mode”. I say cash is king for the most part, with some quick cash flow short strategies.

S&P support is at yesterday’s low of 1274. A bigger support is around 1262-1267, then there is a small tail at 1258. The Japanese crisis low is 1249.

If this perfect storm intensifies- and I see the right set up, a break and close below the 1250-1260 with volume, it can lead to a quick move to 1220. The measured move actually takes us down to 1180.

There will be a ton of trades during the process. If I had to leave for a vacation in August, I would put 70-75% probability that you can short SPY here and cover below 1250 on the way to 1220.

I was watching CNN last night and looking at the interviews with some Representatives. I did see an interview with the Representative from Illinois (Walsh) who voted NAY on the debt deal. The correspondent asked, “why are you taking America Hostage?” He then asked him why? He said that the freshman reps were voted in to make life hard for Congress to just write blank checks. They were voted in by the American people to help Change Washington’s Culture. Then the correspondent asked him, how can HE solve America’s problems when he himself hasn’t paid child support and is $100,000 behind. It’s crazy that these are our elected officials.

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Disclosure: Scott Redler is long AAPL, BIDU, SPY, LVS, JCP.

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