Weekend thoughts

The past 2 weeks has surprised pretty much everyone with it's strength and as I suspected, wiped out or crippled many people who got caught short anticipating the H&S breakdown and then doubled and tripled down on the way up.

I've noticed many of the wounded saying "I've learned my lesson" and vow never to let this happen to them again. We'll just see about that because last time I head this sort of confession was when the SPX broke 875 to the upside and it seems like these same people didn't learn a damn thing. This time though, I think they truly have. But can these burned bears truly be agnostic and play both sides of the market objectively? I doubt it. Their deep rooted biases along with their pride will hinder them.


So, what caused this huge run up? Please for the life me don't give me the group think excuse that it was all Goldman Sachs manipulation. If you truly believe this then stop playing the stock market right now. Close out your account and never make another trade again because you are a loser and you will no doubt be amongst the 90% of people who lose money trading. Sorry to sound brutally harsh but it's probably true. Losers blame other people for their misfortunes, losers don't accept responsibility. Look, I'm sure there's some sort of manipulative activity going on from the "big boys" but there always is to some degree. Last year there were complaints about naked short selling unjustifiably driving down stocks. But the bottom line is last year fundamentals were in free fall. Earnings collapsed by the most amount in history! THAT was why market crashed; the naked short selling may have accelerated things which were heading south regardless.

The bottom line is that the markets will move based upon the general direction of fundamentals or anticipation of them. Not once have I seen these permabears who blame GS ever mention that credit spreads have collapsed, housing prices have bottomed and earnings have began to rebound. Do they ever think that maybe, just maybe, these improvements in fundamentals are responsible for the rally? Or do they think GS manipulates them too?

Last week 4 prominent financial institutions have either raised their S&P 500 year end targets or EPS estimates this week. So, just like how I touched upon before, we are seeing an upward revision of expectations. That folks is what's driving the rally. So please, forget about this GS and PPT conspiracy and open your eyes to reality.

Now that expectations are higher the bears actually have a better chance at success because it could lead to disappointments later on but like I pointed out before analysts where constantly behind the curve all throughout the bear market last year, could they do the same with this bull run? They sure have in the past.

Even if this is a bonafide bull market with another 10-20% upside potential, at such overbought levels it wouldn't be wise at all to chase it. Even if the market grinds higher from here, history suggests a consolidation phase will occur to work off the overbought condition which means the market would likely drop back to current levels or lower at some point giving you another chance to get in.

But if it turns out that this is just one big giant bear market rally that had to use every trick in the book to shake out enough bears and convince enough sidelined money to jump back in before pulling the rug from underneath everyone, then buying at these levels would obviously be a very bad thing to do. That's the sort of rally that happened post 911.


Bottom line: Short term, the extreme overbought condition of the market and the fact that most bears have been blown out of the water suggests a Short term or perhaps even Intermediate Term high in immanent. This Friday 2nd quarter GDP will be released. If it turns out to be a positive number then the "recession is over" mantra which we are starting to hear is going to become quite loud. I'd be considering a bearish contrarian trade if that happens. That doesn't mean I won't pull the trigger on a short trade earlier....I will if I see a good set up.