Wednesday, September 20, 2006
Yahoo sneezed yesterday, traders dumped their positions in panic, and the options market was stormed with orders for put contracts. What does it all mean? That the bear trap has been set and that the top is probably not yet in place. In order for this bear market rally to top the market first has to teach the crowd to lean the wrong way so that it can catch them in a "hold and hope" situation as their positions slowly erode. In order for the market to teach the crowd this perverse lesson, it has to cry wolf a few times (referring to the story of The Little Boy Who Cried Wolf). Yesterday, we believe, the market cried wolf yet again. If the market rallies higher from here, stopping bears out of their positions once again, they will likely have learned the lesson that the market is trying to teach: that is, if you short me again, I will burn you again. But alas, once that lesson is learned and the crowd learns to be afraid of the short trade, then the market will get what it wants: a downtrend with as few people on board as possible. In fact, this plays out well with the scenario we drew on Monday. The S&P has now pulled back near support. A reversal here and a new high would catch the most people unaware and the market always takes the path that catches the most people off guard. A push higher from here would very likely get a lot of people bullish and would allow smart money to make their final distributions. The crowd will then very likely hold those positions they bought here at the top all the way down to this summer's lows. If the market then takes out those lows, those who held and hoped from the top will very likely release their shares at much lower prices to the same smart money crowd who sold to them at the top. This is why we say that the market has a perverse nature. Bottom line: We will be eyeing carefully any strength as we enter the end of the month for shorting opportunities. And, should the four year cycle low take the market back down to this summer's lows, we will start looking carefully at weakness for good long opportunities. The tech sector remains weak here and may have already put in its top.