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September 18, 2008

You Better Be Dead or in Jail!

Monster stock rally, this Thursday only! We'll be ramping everything. S&P 500? Six percent off the intraday low! Banking industry in chaos? No problem! We'll crush resistance! Home builders have no work? No excuse for not rallying. We'll pop them by ten percent! Get your mouse fingers in gear and start buying. If you miss this rally you better be dead.... or in jail!

What a day. When I wrote on Sunday that this would be a thrilling week, I had no idea! As testament to this week's craziness, note that we've already blown away the weekly volume record, and we still have one more day left:

index chart

The evidence is now more compelling that we've put in at least a short-term bottom, and if the SPX can make up the remainder of its 45-point loss for the week, a longer rally will practically be a given. We were facing sheer panic as a multitude of money market funds threatened to break the buck. Keep in mind that bottoms are typically formed when the news looks bleakest. I'm guessing that we now see a rally into the elections, followed by a new bear cycle into a December or January low, but I've got no money resting on this opinion at the moment.

As a side note, here is a profile of my day:

index chart

I covered my shorts mid-day simply because sentiment indicators were approaching extremes and short-term oscillators were reading oversold. As noted in today's earlier post, the SPX was quite stretched below its 75WMA. My fear was that another Tuesday-like rally would be sparked. I was an hour and a half too early... better than an hour and a half too late! My only remaining trading position is a set of short calls on the home builders... which spiked sharply against me... and those may be booted if we see any follow-thru tomorrow.

Stocks were not the only asset class subjected to wild swings today. Precious metals were enjoying their second consecutive 10% up day, only to find themselves down by late afternoon. Is the bear market rally over already? The ugly candle posted by GDX today would suggest as much:

stock chart

All these gyrations were founded on the disclosure by Hank Paulson that the Treasury will shore up the banking system. So much for a free market. Using government (ummm... taxpayer) money to support private industry sounds evil to me. It sounds almost like... wait, I had the word a second ago... what is it?... Oh, yes. Communism! As a fellow trader commented to me on the phone today, "Didn't the U.S. fight several wars to prevent this stuff from spreading?"

In short, I wouldn't be short right now, nor am I planning to add a trading position to my core precious metals holdings. In fact, I may simply take a few days off to let the market settle down to the point where I can enter higher-confidence trades.


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