Morning Value Investing Observations – Monday June 13, 2011

What’s next for the market? Frankly, no one knows for sure. Do I hope we have put in a bottom? Yes, of course…but hope is not a trading or investment strategy. At times like these when oversold indicators don’t seem to move from oversold and the market has just finished its 6th down week since the beginning of May, it’s our job as investors to keep looking under rocks for value and potential in companies with real earnings and strong balance sheets. That’s not to say that one should ignore the bad data points that have come one after another, it’s simply saying that it’s a GREAT time to cultivate your shopping list and to consider what plays you want to potentially move of with “probing” buys on the long side. (Specifics on plays and the exact option setups are reserved to BIO Forum members)

If you were caught long and with high beta despite our calls to exit high beta on plays in April, I know from experience what it’s like watching an unrealized draw down on your account and how hard it is to sit on your hands and resist the urge to use up dry powder especially if you don’t short and choose to only play the long side. In my post “Just One Question (in that classic Clint Eastwood voice): “So, Are You Feeling Lucky??”, I gained an understanding that the bar should be set pretty low for June. We’re half way through the month and it’s our job to consider what we might expect for the balance of this month and beyond. Considering is not knowing, but it sure does help influence money management and one’s participation in the short term trends.

One thing that I found interesting during this correction is how well Bill Spetrino’s Dividend Machine picks have done. I can see why Bill doesn’t short the market. What’s cool is that during times like these or if we were to continue into a worse market decline, Bill’s Dividend Machine newsletter subscribers were put into dividend paying plays at the “right price” (that is HUGE) and those plays pay them to hold those positions unlike a high beta non-dividend payer that melts down and will not make that shareholder whole until the market recovers. Someday, I’ll migrate from trading to holding dividend plays….it’s just not my thing at this point in time.

Those who have been shorting from the beginning of May have a high quality problem of deciding on what positions to close and when to close them. I gave my playbook on what I’m currently watching intra-day in the post for observations on June 6, 2011. Like I said on Friday, I’ll be using the market levels as triggers to my exiting shorts. The support we had in May is now resistance and until that resistance is taken out on a closing basis, I’m going to give select shorts room to roam.

Overnight, Asia Ends Lower Economic Worries Intensify, Australian markets were closed due to the Queen’s birthday, and currently, European Shares Stabilize After Sell-Off. Futures indicate a higher open today, but that’s not an actionable data point and reason to go long. This week is June options expiration week, so volatility through Friday is something that should be expected. We’ve got no economic data points today, but we do have the following on tap for the remainder of the week:

In terms of support and resistance, Long term trend is up and the Medium/Short term trends are both down, only as long as it stays below 1326-1333 (on a closing basis). It takes a move above 1281 to perhaps indicate a short-term uptrend. As long as index stays below 1345, it’s either consolidating or declining. I see the 1280, 1291, 1303, 1313, 1320, 1335, and 1342 levels as the areas of resistance above. The bulls need to regain 1280 on a closing basis in order to regain a foothold in the game again. In terms of support below, I’m watching 1261 and 1241 as areas of strong support.