The equity markets are currently suffering from a not-so-unexpected rally which has catapulted the Nasdaq Composite about 7% off its lows and the S&P500 about 5% from its lows. I say not-so-unexpected since the markets were technically very oversold in mid-April and this time of year tends to be seasonally strong. I say suffering because who says that only the bulls are allowed to suffer?
With impunity in the face of this rally, I have maintained most of my short positions. In retrospect, I would have liked to cover a few of them and re-shorted at these higher prices, but given the current environment Im actually more concerned about not being short when a crisis unfolds than suffering a further rally. I believe that when things start to unwind, they will unwind quickly quickly enough to make the January to April drop look like a tiny dip on the chart.
I also know how to have deference to these rallies and do not plan to add to my shorts currently. The extent of this rally will depend on how much pain the shorts, and specifically hedge funds, can endure. These bear market pops can be terribly disconcerting for those who hold through them. Looking at the deflation of the Nasdaq Composite in spring of 2000, you can observe a bounce of over 33% and another 20% pop shortly thereafter. Although quite sharp, these pops tend to have the relieving aspect of brevity.
They key to navigating these times is to never be too leveraged so that you dont get washed out during a rally, and so that you have the ability to add to your position if you see the opportunity.