Weak longs shaken out

On Aug 3, I made mention how the market was sucking in weak longs which was ST bearish for the market. Amongst the weak longs are the traders who are permabears at heart but now claim to “play both sides of the market", your run of the mill market technician and the mutual fund idiots...ooops did I say idiots?...sorry I meant "investors". Those same "investors" who poured $8 Billion into equity funds a few weeks ago now pulled $9 Billion out this week with the market down 4.5% since. Surprise, surprise, they got it wrong! The other sources of dumb money have also pulled in their horns after this dip. You see...they are called weak longs for a reason.


In today's game of chicken environment more than ever it's important to pay attention to the schleps of the market which I identified above and fade them or at the very least step aside for a better set up.

Regarding the idea of shorting bonds, I believe this is a crowded trade at the moment. I'm seeing a lot of traders contemplating or already in the same trade (some of whom have less than enviable track records). A similar thing happened in the fall of 2008 as bonds were making a parabolic surge. A lot of trader types shorted bonds thinking they were way overbought only to get ran over further fueling the upward move as they capitulated. It would have ultimately been profitable if these weak shorts hung on to their positions and took the pain for another 1-2 months but most of them probably didn't. Doug Kass is also quite bearish on bonds calling it a generational sell. If Kass ever gets something right he's often early (his bottom call in March 2009 was a rare time when his timing was excellent). I think we are in the same situation here with bonds as we were in the fall of 2008....if you short you probably will be rewarded in 2-4 months time but in the interim you will feel pain and frustration.

Thus, I'm lowering my downside target for the 10 year to 2.25%. On a ST basis bonds could see a bit of dip here. If the market rallies next week and bonds only sell off modestly that would be a tell that there is still one more surge left before they finally top out for good on a medium term/long term basis.