Monday night my watchlist was ripe with short candidates. Monday had been good to me and Tuesday was great. Still net short when Wednesday news of the big mortgage bailout started to gain traction. I got plowed and took down a lot of risk. The bulls had gained the advantage and bears like myself were on the run. By Thursday I was almost flat. If not flat, unlevered and market neutral. That was the day the bulls gained a significant advantage in that we catapulted through all of the key resistance levels on the DOW and the S&P.
Big week for the bulls. Apparently the market is convinced that the bailout will make us all whole. We may have to throw out two hundred years of contract law but as long as the bull remains intact it all be OK. Sure. As a seller, this all leaves me feeling pretty demoralised. Hence my decision to basically go flat and sit on my hands after the big ramp job Wednesday.
Not thrilled to be net long. Not in any meaningful way but it's more or less a reflection of having covered nearly all my shorts. Good thing too. Nothing more dangerous than a wounded bull.
The short side was the right trade and I feel like I got de-balled by some bullshit bailout. But this sort of thing is to be expected if we are undergoing a trend change (and that's not a certainty at this point). The bulls will pull out all the stops to keep the run alive and staunch the selling. The averages will gyrate back and forth through the 200-dma until the psychology changes and reality sinks in. Don't underestimate our government's ability to dream up half-baked bailouts. This is two bailouts now (including the SIV bailout proposal).
Net-net I didn't make much of anything this week. Some beer money. Had I refused to acknowledge that the bulls had gained the advantage I could have lost myself a small fortune. Wednesday alone I gave back the equivalent of Zambia's GDP. So discipline won out over emotion and from that alone I derive comfort. I actually have some longs I'm excited about.
At some point I decided to ease off until year end and reflect. Unlikely that will stick but it sounds appealing after all of the nonsense last week. The market has unhitched itself from reality but that doesn't mean we can't go higher still. The consensus is that we will rally until January. Seems too cute and convenient to me but I'm in no mood to take the other side of that trade right now. It's been a phenomenal year. No sense in getting gored.
Saturday, December 8, 2007
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