Friday's Jump: Sucker's Rally

You have to imagine the hedge fund professionals were playing it cool Friday while the Dow rallied by 2.9% on the first day of the New Year. Only they know the size of redemptions that they need to fulfill after the rush to the exit at the end of last year.

So, allowing the optimists who drank too much at New Year to buy a few stocks and improve the liquidation prospects is just a good trading strategy. The numbers still look awful and the Dow is way too high given the outlook for losses. But will this rally last a few days or a few months? That is harder to tell.

Cash Still King

The sensible investor has sold and is hoarding cash. Indeed, that is a problem for the Fed and its stimulus plans. Until people can see a real upside they are likely to both hold onto cash and take cheap money and sit on it. Ditto the banks.

If you are looking for green shoots of recovery, there are few in sight. Lower commodity prices, particularly oil, and some improvement to the credit markets provides a glimmer of hope, but the downturn in the global trade cycle looks awesome for 2009. Besides, Middle East instability and the Gaza War could send oil prices back up.

Sucker’s Rally

No, I am afraid any rally in stock prices will prove a sucker’s rally - and it will not be long before something happens to trigger the inevitable sell-off by the hedge funds for their redemptions, and once that starts it will be quite a big down leg.

Will that also be bad for gold and silver? That was the lesson of 2008, but confidence in the dollar is beginning to wane with the size of bailouts and stimulus packages and the implications for the bond market.

It would be unwise to place too much faith in the greenback, and better to at least hedge with precious metals. The rush from the dollar to gold could be very quick if history is any guide.

Comments

[sculptor:]

I don't trust the dollar, but its the best currency to trade in lately, I keep in coal, oil, gold, that where wealth can be stored and optioned out for 5% -10%profit per month... I will short treasuries in 09 , Retail? LOL Real Estate? LOL

The only growth I see is in infrastucture plays and alt energy which is a great double play on both energy rising in cost, and new stim infrastructure spending.

Jan 04 06:32 AM

[standfast77:]

I think you should of titled your article " Sucker Selloff" at the end of December. What makes no sense with your article is it proposes some "hypothethical" timeframe for investors.
Is this a good time to go Long with a 10 or 20 year time frame? What about a 2 month time frame? Hell yes!
Why don't you take your own advise and go short here, if so your portfolio will be reminded of Aryabhata's greatest discovery: the concept of zero.

LONG Vern Silver

Jan 04 08:26 AM

[axelrod608:]

I'm expecting volatility to keep things, er, interesting in 2009. Ido not believe this is a "buy and hold" year. The nimble trader with tight stops and option hedges will probably avoid disaster and may even make a buck this year, but the buoyantly optimistic will face disaster once again.

What is most interesting to me is that all working on the same numbers, forecasters are calling for inflation /deflation/hyperinflat... gold up/down, markets up/down, commodities up/down, treasuries up/down, dollar up/down.... Concensus is taking the year off.

My predictions ? One - 2009 will have all the same elements of 2008, including uncertainty and unpredictability and Two - from time to time, Mr. VIX will drop by to offer an opinion of your trading strategy.

Keep your powder dry, your stops tight and your seatbelt fastened.

Jan 04 11:29 AM

[gybognarjr:]

If everyone is so smart, especially professional investors and speculative journalists, how can the World financial foundation be in such a big mess? The market has only one single purpose, new businesses can raise capital. All other activities are only chance, roulette, pure speculation, luck and the more explanation and implied logic one tries to give explaining an investment strategy in the market, the more stupid he is.

Jan 04 11:37 AM

[adan:]

for me, so many trend predictions, mine and anybody else's, of dollar to gold, higher oil, market down, are time dependent for risk/reward use

but liked your article very much, reminding me of the waiting hedge fund hordes spotting when to redeem and dump

though, after that, a larger more sustained (more than a month) bear rally could finally be let loose

we see! :-)

Jan 04 11:42 AM

[SteveD64:]

I think if 2008 taught us anything it is that the "professionals" don't really know any more than the average small trader.....Bill MIller being in FNM, LEH, and BSC etc etc.... is just an example of "what the hell is he thinking"

People that own gold are going to realize soon that it is a dead horse....it is of a different era....it will drop below $200 or maybe lower.....

And, with all due respect, you are not in the stock market at all.....the landscape is littered with people calling for the end of the US for the last 40 years at least....

Jan 04 02:59 PM

[auto44:]

If the pros don't know anything as you suggest and can't predict anything,what special blessing did you receive that makes you capable of predicting the price or even direction of gold. Crystal ball?????????????????


On Jan 04 02:59 PM SteveD64 wrote:

> I think if 2008 taught us anything it is that the "professionals&amp...
> don't really know any more than the average small trader.....Bill
> MIller being in FNM, LEH, and BSC etc etc.... is just an example
> of "what the hell is he thinking"
>
> People that own gold are going to realize soon that it is a dead
> horse....it is of a different era....it will drop below $200 or maybe
> lower.....
>
> And, with all due respect, you are not in the stock market at all.....the
> landscape is littered with people calling for the end of the US for
> the last 40 years at least....

Jan 04 08:28 PM

[Acronym:]

Can somebody please explain how this whole redemption thing that the hedge funds are doing works, please explain it as if i was a complete novice...Thanks

Jan 05 12:12 AM

[Paulo:]

Geez, just go into Google and type in 'redemptions from hedge funds'.

Jan 05 01:11 AM

[norom:]

of course theres going to be profit taking. There always is. Predicting a sell-off after a general rise is like predicting the tides of the ocean. It takes no special talent.

Jan 05 09:10 AM

[raytayzmd:]

...I suspect redemptions are old news at this point -- they have either been met or else stonewalled by the funds...and any further redemptions won't start to have an effect until further into the quarter...more important, I believe, is that the funds have been forced to deleverage...I think it was forced deleveraging that hammered the market more than hedge fund redemptions anyway...if the credit markets do loosen up and the hedgies finally get some "play dough" to work with, it might be a surprisingly good year.

Jan 07 01:13 AM