Bernanke the Bearslayer

Bears are proven wrong yet again.  How many times will it take before they realize they are on the wrong side of this market?

MARKET SENTIMENT

Fed announced more mortgage buying and as a result, blew all the shorts out of the water.  It is dangerous to go against the trend and no matter how many times it ends badly, people still keep doing it.  But a short squeeze can only carry this market so far; we need follow on buying to keep this rally going.

Think about what is going through the heads of big money managers underperforming this market.  A couple of weeks ago the WSJ reported only 11% of hedge funds are beating the indexes.  Days like today won’t help and now they are stuck between a rock and hard place as they try to save their jobs.  The market has not pulled back like many were expecting and the longer they wait, the further they are falling behind.  At some point the pain of regret will become too large to resist and they will plunge in and start chasing.

Today’s pop will be the final straw for many reluctant investors as they are no longer able to deny this rally’s strength.  No matter how solid their analysis is, right now they are faced with only two choices, buy this market, or lose their job.  That will be an easy choice for most, but the ironic thing is their buying will mark the start-of-the-end for this rally.  We are past the halfway point and savvy investors will be on the lookout for signs this party is coming to an end.

MARKET BEHAVIOR

Market continued the trend of tight consolidation mixed with the occasional spike.  This is stereotypical behavior of an over-shorted market where bears are getting their faces ripped off on a regular basis.  Maybe congress needs to enact some new regulation that says if something isn’t working, stop doing it!!!  Of course I really don’t mean that, these bears keep giving me all their money, and besides, legislating common sense never works.

The interesting thing will be watching if the market changes its personality in the coming weeks.  These new highs and big moves are getting fairly obvious to everyone.  And if there is one thing the market doesn’t like, it is being obvious.  We’ll probably head higher for a bit, sucking in a larger number of chasers, but by the time everyone has come around to accepting this rally, that will signal the end of it.

TRADING OPPORTUNITIES

Stay long, but start eying the exit.  There is some upside left, but we’ve come 15% since the June low.  That is a big move for the indexes and it would be foolish to expect we have another dozen percent of upside left in the tank.  The key is watching other traders for signs of when too many of them become bullish and are fully invested.  That will be our indication to start taking profits.

INDIVIDUAL STOCKS

Most everything is up today and if it isn’t, it should be dropped like the boat anchor it is.  Further, don’t chase stocks that are extended because they are prone to pulling back after some of this euphoria dies off.  If you are out of this market, wait for a valid entry point before buying in.  There will always be future profit opportunities, but losses are forever.  Don’t force a trade when you can simply wait for the next one.

Stay safe

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