The facts on the U.S. equity markets are pretty clear:
- The markets are valued for a V-shaped recession/recovery.
- The retail investor is pulling money out which is reducing trading volume.
- Institutional investors are all in (cash in portfolios is very low.)
- The market is supported by massive liquidity injections which have lowered interest rates, increasing the tolerance for risky assets.
- A lot (maybe almost all) of Hedge Funds are fully leveraged.
- Properly invested hedge funds can make money on the way down and how to do this is well known.
I was a broker in '87 and saw the Fed rescue the market by knocking yield on the long bond down 1.3 percentage points in a few days as shown on the chart below.
Back then, the long bond was yielding 10.24%, today (1/12/2010) it is at 4.64% so there in not as much room for a Fed rescue.
If you manage a Hedge Fund you need to ask yourself: "Can I define the tipping point well enough to execute my plan before the market jams?" If the answer is No, you need to rethink your correction strategy because the Fed net is not as strong as it was in 1987.
Disclosure: Short Market