YZ, i agree one has to approach the short side carefully here. the market's reaction to the Fed tightening will very likely take the shape of a 'relief' rally similar to what we've seen on occasion of the last five tightenings.
however i would argue that today's market differs from '94 in several crucial aspects. the most glaring is of course that the market (in terms of the S&P....i will be merciful and leave the NAZ out of the discussion<g>) was only slightly above the upper range of its historical valuation range in '94, whereas it is in previously uncharted territory now, i.e. the gap between its actual valuation and 'fair value' as calculated by the most widely used discounting models has never been as large as it is now. secondly, the example cites the fact that back in '94, everybody who could short the market actually did so in expectation of a decline in the face of a tighter Fed. this is apparently not the case now, as the NYSE short interest ratio hovers at a historically very low (neutral) level, and the Rydex bear funds have had no discernible inflows for months.
the psychology after years of phenomenal market gains is simply different than the one reigning just before the bubble really took off.
it remains to be said that the period immediately ahead, bracketing the Fed meeting, is a 'high risk' or what PEI calls a 'panic cycle' period in terms of time segment analysis. the last such period (mid March) was resolved in the form of a big rally in the Dow/NYA/SPX, so it was really a buying panic. interestingly it was also an expiration week that ended with a full moon, similar to the week ahead.
however there is no guarantee that the resolution will be similar this time. but it is very likely that a large, high volatility move is coming. it is probably best played via straddles in index options.
regards,
hb |
