Still Looking For A Rally

As readers know I expect a second half slowdown, so any buying I do is inherently a trade. There were many powerful counter trend rallies during the bear market that began in 2007 and even if we are entering another bear market there will be trading opportunities from the long side. This type of trading is not for everyone because it requires extreme nimbleness.

I believe that in the short run the pessimism has become too thick:
  • Yesterday, we saw put buying that was only matched once during the 2007-2009 bear market. In addittion, the 10 day moving averages of the put/call ratios are in extreme territory.
  • Rydex traders are at levels of high pessimism.
  • Yesterday, many of the hiding places that have held up well during the decline were pummeled. That typically occurs near the end of moves.
The following are my concerns:
  • These type of moves tend to last about six weeks which would measure to the beginning of June. However, we could see a throwback rally now and a retest at the beginning of June before a better rally develops.
  • Sentiment surveys are not extreme yet. That likely has to do with the duration of the decline as well. By early June the crowd should be in the bear camp.
  • The global economy is unbalanced and something can snap at any time.
  • Given how much the market has fallen margin calls can become an issue.

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