Our Pullback to S&P 870 Is Here

As we wrote yesterday [Make or Break Time for some ETFs - China Ignoring News as Well]

After such a large move up in a short period of time - a healthy action would be a retrace to S&P 870 or 840, some consolidation sideways, and then a new leg up for a final Santa Claus rally.

So we have our first pullback to S&P 870. So far the action still has been "healthy," but I find it hard to trust anything in this market. If we are indeed in a new "mini bull" (within a bear) phase, we want to see this pullback bought hand over fist as Santa Claus gets his game on and we embark on the "rally into year end" nonsense. If we break below S&P 840, all you will find in your stockings are empty cartons of instant Kool Aid. It's actually quite an important time here for the markets, as the only way people like me will trust any move is if the lemmings buy all these dips - then we'll join in and sing Ho Ho Ho as well.

I'm watching the reaction to these levels very closely. Still in high cash and not trusting anything in this market, but as we noted yesterday, we began rehedging with Ultrashort Real Estate (SRS) (now up 30% on the day) and Ultrashort Financials (SKF) (up 16%). Volatility remains insane. We don't have to "predict" just "react" in this market. We have a 50/50 chance to go either way in my opinion - depends if we go down the hope route or reality route the next few weeks. I still think hedge funds "want" to mark up this market late in the year to make their performance look better than it is.

If this is a "buy on pullback" time instead of "ah just kidding about that suckers rally" moment, we'll look to buy some of the things working of late like infrastructure, China, and the like. I'd rather buy on a strong push north of S&P 900 however; this would show me buyers are real and it's more than quant hedge funds playing a "theme" for the day/week. Honestly I'd like to see us get over that ugly red line to believe in any of this fairy tale.

Open question: how do we rally on late cycle (infra, commodities) when early cycle (housing, banks, retail) has not yet rallied? Now we are going to reverse the business cycle? Only in the casino....

Disclosure: Long UltraShort Financials, UltraShort Real Estate in fund; long UltraShort Real Estate in personal account

Comments

[Illusional ...:]

I think the easier way to predict the market is to know that you can't predict it and get out of the market.

If you want to predict it nonetheless, it will probably be down to your heart. Do you believe Dow will come back to 14k or do you think its the end of the world?

For me, I'm short, cos I think there is nothing positive out there to inspire investor confidence. Bailouts are rash actions to just numb the pain. It will come back in a worse off fashion and I hope the politicians will start doing their job properly and not just print money thinking that it will solve the problem.

2008 Dec 11 07:17 PM

[Teutonic Kn...:]

Just to add a few cursory remarks. It doesn't take a great economist (and I am just a lowly working class engineer) to see that there are only two things that would propel the equity market: No. 1, wages, salaries, earnings, dividends, etc.; No. 2, financial credits of all kinds be it credit cards, mortgages, loans, equity lines, commercial papers, company bonds, you name it. Given the conditions of the current crisis, these two categories are going to come short and are likely to go down, further down in the near future as unemployment goes up.

So it is easy to see the obvious.

2008 Dec 11 10:51 PM

[Big-P:]

Or you can use my method of forecasting and simply forecast the move one day...and then CAUSE it the next day.

When are these little guys going to learn that this market is MY playground?

I told all of you yesterday that I was going to smash the market today and that's exactly what I did. In fact, I'm in here pushing them down NOW in the afterhours as well.

Your "breakout" was simply a "fakeout" boys. When will you ever learn?

I'm not going to continue my little experiment much longer so if you kids want to make some serious $$$ you better swing by the site on occasion and check out where I'm going to take this market next. Hell no, I don't advertise. I don't need to...

2008 Dec 12 01:33 AM