Calling For a Rally

I believe that the risk/reward is starting to shape up very favorably for a rally. I have been complaining recently that sentiment refuses to tilt into excess bearishness. I believe that all that changed on Friday. Following Obama's speech all I heard was dire talk. Anecdotally, this was the most bearishness I have seen since June. We are also seeing some empirical evidence that there is excess bearishness as well:

  • The assets in Rydex bear funds as compared to Rydex bull funds reached their highest level since June. This applies to the leveraged funds as well.

  • The CBOE put/call ratio has been above 1.10 for three days in a row. That is extreme put activity.

  • The volume in SDS, the Ultra short S&P 500, was the highest in over a year on Friday, per sentimenTrader.com.


We have often seen follow through selling on Monday's after a nasty week followed by a Turnaround Tuesday. I am already positioned long but if we do see a decline on Monday I plan to expand my long position. I believe a rally is in the cards.

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