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September 11, 2008

Mama's Got a Squeeze Box

This bear market is doing what bear markets do best: making it very difficult for traders to stay committed to shorts. After a morning drop, the market fought back in what initially looked like a classic consolidative bounce. With less than an hour to go, the consolidation appeared ready to roll over, a development that would have set us up nicely for a Friday selling diluge.

However, it was not to be.

As the session drifted into the home stretch, rumors circulated that Lehman would find some witless investors to shore up their balance sheet. Equities grabbed onto this news and rocketed more than a percent higher during the last 25 minutes of trading.

index chart

Now who would want to pour money into a defunct investment bank, and why traders would deem such folly positive for the world is beyond me. But the fact of the matter is we now have a market that looks, on the surface, more like its searching for a bottom than collapsing.

index chart

index chart

index chart

The problem here, I think, is that the "fade the bailout" play was too easy. The market is not going to just go straight down and hand the bears a bunch of money. At the same time, this action draws in a bunch of retail money for a long play. After all, it does look like a double bottom, and the candlesticks recorded today look juicy. This is all just what we need to set up a heavy sell-off. Therefore, I plan to call the market's bluff and stay short. The more I look at today's action, the more I believe it was nothing more than a short squeeze.


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