Securities Research Services

Friday, January 11, 2008

Use Caution Going Forward

The market responded somewhat favorably to Bernanke's speech yesterday. We would urge extreme caution here though if you are thinking of going long.

Yes, the market is technically way oversold. And now the Fed promises to do something if necessary – not really anything new going on here.

If you are tempted to make a long side bet, keep in mind that you are making a bet against the primary trend. That doesn't mean that long positions won't work here, but since surprises tend to occur in the direction of the trend, risk is very high here. It might be a good idea to use call options if you are going long so as to limit the downside to the premium paid.

Japanese markets today continue to diverge lower, following through to a fresh multi month low, so this is one more headwind bulls must face in order to eke out a gain.

The long and short of it (pun intended) is that the market may certainly be at a tradable bottom here. Yet, it faces a high degree of headwinds to the upside and the path of least resistance is down from here. So, if you are long, be very quick to admit you were wrong and exit if things don't go your way.

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