19 May 2008

QID - Boosting My Short Position

By midday today, the Dow had made an impressive run over 13,100, up over 1%, whereas the NASDAQ lagged behind, struggling to maintain 0.5% or 0.6% gains.

I entered a limit order near the day's lows for QID. Soon, my order filled at $36.89, and the market dropped, taking QID up to $38.50 intra-day before settling at the close at $37.76.

It looks as though I read the market action correctly today. Very satisfying.

This purchase lowered the cost basis of my now two-month-old QID position to $41.49.

So how did I make this decision to stare down this tech rally?

First off, Trader's Narrative started off a recent post with this bit of insight:

NASDAQ:NYSE Volume - I touched on the relative lack of volume and how this has historically marked tops, rather than spurred on rallies. Another troubling volume development is the ratio of volume on the Nasdaq compared to the NYSE. We are seeing a spike in this ratio, meaning that Nasdaq volume is significantly more than NYSE volume. Since the Nasdaq represents the riskier side of the market, this has usually meant that there is too much froth in the market.

Second, $NDXA50 closed last week at 84, meaning 84 out of 100 NASDAQ-100 stocks were trading above their 50-day moving averages. I wrote that I wouldn't use a high reading as an automatic trigger to short the market. That doesn't mean it's not a useful contributor to the NASDAQ-is-overbought argument.

Third, the RSI(2) reading for the NASDAQ at midday moved up to about 95; the RSI(14) approached 70. The NASDAQ was looking overbought in the short-term and in the longer-term.

Furthermore, Aaron Task and Henry Blodget at Yahoo!'s Tech-Ticker summed up the conventional market wisdom on the bear side quite nicely:

From a contrarian perspective, too much optimism -- as reflected by the falling VIX and other sentiment gauges -- is a negative sign because it means most people have already placed their bullish bets.

Furthermore, the fundamentals of oil, inflation and how the slowdown in housing is affecting consumers -- see Lowe's results and guidance -- provide formidable headwinds to a sustainable rally.

In addition, second-half earning estimates remain extremely rosy, meaning the market is not as attractive on a forward P/E basis as the bulls would have you believe.

Put all of these factors together, and that's why I boosted my QID position.

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