The Best Laid Plans

After six months of non-stop rallying and two months of extreme bullish sentiment, it would be healthy if the market finally corrected. That would have us headed into the seasonally strongest month of the year, April, with the market just having completed a correction. Unfortunately, it seems that investors refuse to back off their bullish stance despite scary geopolitical events and soaring commodity prices.

Without a correction it is difficult to take too strong of a stance in either direction. Investors are ill prepared for a potential shock from geopolitical events and there is tremendous downside risk if the situation in the Middle East worsens. Conversely, during seasonally strong periods like April extreme sentiment often takes a back seat. Last year, sentiment was extreme heading into April but the market climbed another 5% in April before finally reversing in late April.

There are two scenarios under which I would be confident taking a strong market stance. The first is to go long if we correct into late March. The second is to go short at the end of April/early May if we don't correct before then. As of right now I remain hedged (via SPY Puts) and am not taking a strong market stance.

2 comments:

CP said...

You seem to be positioning to buy a dip, i.e. a 10% correction.

Aren't you worried that the financial crisis isn't over, and this would be the start of something bigger?

Tsachy Mishal said...

Its more of a trade for the month of April, if we get a correction first. After April, I would be much more careful.