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I wrote Tuesday night that the ES futures were down significantly after the news that Bank of America (NYSE:BAC) needed $35B in new capital as a result of the stress tests. Perhaps this would be the signal for the long awaited pull-back. I was hoping (and still hope) for a test of the 875 which would then help drive the next leg up of the rally. Not only did the ES futures recover much of the lost ground during European Trading, but the surprisingly optimistic ADP jobs report sent them into the positive, leading to a gap-up open.

The Making of a Bear Hunt

The drop in the futures Tuesday night had indicated that the bearish investors were finally getting a chance to force a pull-back. However, the ADP job numbers created a giant short-squeeze. What was surprising was the way the financials responded. Bank of America which was down 11% in European Trading gapped up and opened 10% higher! And this was a bank which was being forced to undergo a massive amount of dilution!

The market behavior showed how over-eager bears are pushing the rally along. There is an underlying bid in the market which is buying any dips. These are the investors who have lost their patience waiting for a pullback and are now jumping in at the first pullback. The bearish investors get trapped in their short positions, since they are unable to push the market down. They then rush to cover pushing the market higher.

Bank Rally: A Pre-Cursor to Secondary Equity Offerings?

This spurt in the share price of banks is creating an opportunity for undercapitalized financial institutions to issue new stock. The rate at which the banks rose in the relatively thinly trade pre-market hours after the ADP job report suggests that there may have been a concerted effort by the Street to provide support to the banks. Providing support to sectors which need to issue new equity via secondary offerings is standard operating procedure on the Street.

Divergence: Nasdaq100 and Russell2000 Show Some Reduction In Risk Appetite

During the early part of the day, the Nasdaq 100 (QQQQ) and the small cap Russell 2000 (NYSEARCA:IWM) did not show the strength being displayed by the large caps S&P500. While the S&P 500 (NYSEARCA:SPY), led by the financials, energy and industrials did not fill the opening gap, the IWM and QQQQ filled the gap and were negative for a greater part of the day. This reduction in risk appetite was evident in the bond markets also where the long bond finally got a bid, include a spike after the results of a Treasury Auction were announced. IWM and QQQQ did participate in the financial led rally in the afternoon to erase their losses but they lacked the strength of the large caps.

My Portfolio: Sitting on Cash Hurts

In a previous article, I had highlighted the megaphone topping pattern being formed by Apple (NASDAQ:AAPL). In spite of the gap-up open, Apple went on to complete the pattern reaching a low of 130.20 before rebounding later in the day with the rest of the market. Even though Apple rallied from the lows, its price action did not show strength, with all rallies being sold. I have scaled out from a bulk of my short position and puts, and will close out the position on any subsequent weakness.

RIFIN The Index Behing FAS and FAZ

I also opened a position in FAZ, the 3x short financial ETF. RIFIN, the index which FAZ tracks is up 15% this week. Though the stress-test results have been interpreted as positive for the financials, there is a good chance that the there will be some profit-taking in the next two days. RIFIN also reached the high it reached in January, so there is some technical resistance also.

I rolled over some my TSO calls into Out of Money June calls to lock in some gains and profit from any potential break out or buyout which might happen. I continue to hold my TLT positions. It showed signs of life today. I also opened some Put positions in Fortress Investment Group (NYSE:FIG), which has almost tripled in price in the past few weeks, and gapped up big after earnings today. The stock has sold off since the gap up open, and is very likely to retrace some of the gains

Like many others, I am getting impatient waiting for a buy-able pullback to be able to position trade. Until I get that chance, I will continue to trade in and out. It is definitely hard to sit on cash in such a bullish tape though.

Source: Optimistic Jobs Report Triggers Bear Hunt