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Nice 3 day run for the S&P.
Starting with the gap down Thursday morning following London’s terrorist attack, the S&P (as represented here with the Spyder ETF) is up about 3.1% in three sessions. That is some strong momentum. And while being overall short at this point has much in common with liesurly standing around on train tracks, I am beginning to hedge my Longer Term accounts with some short positions in the SPY and DIA (a DJIA trading vehicle).

There are 4 primary reasons I’m getting a little bearish on the indices at this juncture:

One is the price action and volume in the mainstream Exchange Traded Funds (ETFs) — volume has dropped each of the the last 2 days, and the range got smaller today also (while still going up, rather than pulling back). Those are signs of a move getting a bit long in the tooth, and I can’t count how many times I have seen volume in the ETFs slow way down right at a short term market peak (btw, volume in those same ETFs tend to spike at short term lows).

Two, we just closed over the June highs for the first time. So, those who buy breakouts are going to jump all over this move. Unfortunately for those folks, professionals typically sell breakouts rather than buy them. You can probably guess which group of traders typically wins out in this scenario.

My third reason to be skeptical of further upside here is along those same lines. Today is the 3rd big up day in a row. An old Wall Street maxim regarding this scenario goes somethig like this:
In market rallies, the Really Smart people buy on the first day. Then the Semi-Smart folks see this, and come in and buy on day 2. On day 3, the Dummies finally figure out that the market is rallying, so they load up. Then the move is finished, and the Dummies sell stock back to the Smart folks at lower prices over the next few days. It’ll be interesting to see how this psychology plays out for the rest of the week.

Fourth and finally, the indexes tend to make short term reversals in the middle of the week.. usually on Tuesdays.. and to a lesser extent, Wednesdays. Traders don’t call it “Turnaround Tuesday” for nothin.

I would prefer to enter some shorts in SPY and DIA on either a gap up on Tuesday morning, or if they trade over today’s highs and then fall back down thru those numbers — what I call a Tradeback entry (as discussed in my previous post re: FWLT).

Keep in mind, I am only very short term Bearish on the indexes.. as in, for a few days this week.

And.. i have several Swing long positions on right now: RSTO, NCTY, KEYW, VDSI, RTSX, ROYL, and of course that lovable little FWLT thing.

This moment, the Swing portfolio is 100% long (all longs, no shorts) but only 30% invested (30% of capital in play).

Long Term account portfolio, in order of position size:
FWLT, ALSK, JEC, TKP, MOT, NCTY, PWR, FLR, FRO, CIB, ULTI, LTON, GW, and a smidgeon of SPY short.