The Fat Lady Is Not Singing

I don't believe that two down days have gotten rid of all the excess bullish sentiment in the market. To summarize:
  • The Investor's Intelligence survey showed the lowest number of bears in decades.
  • The American Association of Individual Investors showed the least amount of bears in years as well as extremely low cash allocations.
  • Fund manager surveys showed widespread bullishness and low cash allocations.
  • There was a level of call buying that had not been seen since the Internet bubble.
  • Rydex traders were heavily invested.
This type of extreme will take time to work off. So why have I covered my shorts?  The S&P 500 has gone down 40 points in a straight line right into support. Most markets don't move in straight lines (recent experience not withstanding) and there is give and take. I don't believe we have seen a durable bottom, but that doesn't mean we can't bounce.

2 comments:

Anonymous said...

I hear you, you are very brave. I did not see much capitulation yesterday, just a grind, so I only covered small on the close.

The market is responding much more negatively to earnings than this time last quarter, and last quarter we saw a >6% pullback. I expect a bigger drop this time (a) because of the negative reaction so far, (b) we are coming off higher valuations, and (c) we are coming off more lopsided sentiment.

I would not be surprised by a 10% drop in a short amount of time and I can't risk the possibility that it goes without much of a bounce.

JD

PJ said...

My reasoning is the same as JD, and I'm also sticking with my shorts.

You have to account for time as well as distance on the down move. The markets have not given longs a chance to sell. After 9 months of straight up markets with nary a correction, 3 down days in 4 is not enough time to work off extreme bullishness.

Yes, the Nov-Dec congestion area we are now in should serve as support, and there will be bounces here. But I would expect us to linger a bit in the 1090-1115 range, not bounce back above the range as we would if this were a bull market.