Trying to make sense of it all

Ok so what happened last week? As I suspected it was fueled by massive covering. Too many bears pressed going for the kill when it looked as if the market was going to break down only to get blindsided by surprisingly better than expected economic data. How can I be so sure of this? Here's a few of excerpts from the permabear retail trader types I follow

I'm glad you covered. I waited and had one of the worst trading days ever. I got really hurt.

Yesterday was full of distractions too which compounded the problem. I'll have to take my losses and re-enter when I'm at a lower risk point

Today was my worst trading day ever, measured in dollar terms.

I picked the wrong week to make my first Put buy. So much for Sept being a downer (this comment is from Lester aka the worst trader in the world).

Two of these guys happened to have the worst trading days of their lives. Coincidence? What does that tell you? They were pressing going for jugular and they got caught like a lot of people I'm sure. You might be thinking "well this is only a few people who got burned...how you can be so sure it represents the majority?" Fair enough....to back up my thesis I defer to "market action". Most of this bounce has been done via gap and go action which is the classic signature of panic short covering. I have seen and documented this action time and time again.

The market has been frustrating for me because I've been waiting for the market to give the green light for a LT bottom to this consolidation phase that I believe we have been in for the past few months. At that point I would feel confident to buy and hold positions instead of having to play the game of chicken with other traders watching the tape tick by tick. Anytime the market was close to giving the green light, i.e. when sentiment was overly bearish and the market was much oversold, instead of getting that final washout/capitulation we get this gap and run short covering rallies that end up ultimately fizzling out putting the market back in the same situation a month or 2 later.

Maybe one of these short covering gap and go rallies will be the spark to "real buying" and maybe I'm making too much out of this "market action" fixation. Perhaps, but it has served me very well over the years.

ST we are well overbought now which argues for at least a decent pullback coming. But when bears get trapped badly like this, most times such a pullback doesn't come instantly which argues for choppy action for a least a few days. But hey, your guess is at good as mine.

This broad market is too casino-like for me right now which is why I've been sticking with the micro/small caps that are trading in their own little world. I realize however that it's still important to pay attention to the broad market because in the event of a massive meltdown such as in 2008 very few stocks trade in their own little world anymore....it becomes one big world...of hell. Since I believe the market may be vulnerable to another decline sometime down the road but not another meltdown, I'm confident enough to play these fairly non-market correlated micro/small caps.

I'm waiting for the opportunity to play some aggressive LT call options on the major indicies and names that have high beta when I believe we have seen the final bottom. In the meantime I will stick to non-correlated micro/small caps and ST trading positions (only if there's near perfect set ups for the latter).