Ignorance Is Bliss
By Austin Passamonte
Ignorance is defined as the state of being unaware. That's been a
recent strength in making money from these markets lately.
A number of professional traders we know, men and women who trade
seven and eight-figure accounts have watched this latest rally
for the first hint of weakness to short. There were plenty of
hints along the way and most of these pros continued to go short.
All of them believed we were ready for the next wave down to new
market lows and tons of technical & fundamental analysis existed
to back their educated opinions up.
Gann Waves, Diamond formations, stochastic signals, ADX, RSI,
William's %R, VIX were all warning of a bearish reversal for the
last several sessions. Fundamentalists were sure that IBM & MSFT
couldn't possibly make their numbers and had to warn. As a matter
of fact, no tech companies were expected to fare well at all and
it's just a matter of time before the markets would bottom again.
Oh really?
These are traders we're actually familiar with let alone hedge
fund managers watching over multi-billion dollar fortunes who
were massively short as well. It is safe to say these are some of
the brightest and most successful veterans in our game.
And therein lies the problem. Too many false rallies were seen
born & die. Too many times they chased markets up and bought the
top just before prices pulled back. Too many times they've heard
analysts tout the bottom is in place only to see markets cave in
from there. Too much experience in the trenches can cloud one's
vision.
Happily Ignorant & Rich
New traders on the other hand are blissfully dumb. And
prosperous. They see markets roaring up and fearlessly go long.
Markets are up +30% - 50% in five sessions? Let's buy... it will
surely be higher tomorrow!
That has been a recipe for riches this week, especially for those
holding OTM calls into Wednesday morning. Some traders have
reported to us that they made a year's living expense in ten
minute's time holding OTM index options bought Tuesday night and
sold Wednesday noon. No one can deny trading the tape really
works, especially when super-charged by the Fed.
Now what? Do we chase these markets higher like 1999 all over
again or wait for a pullback? Momentum bulls are out in force,
buying up every tech darling in sight while money flows into the
marketplace faster than Niagara Falls. Should we all jump into
the fray and grab our share or will everyone wake up on Monday
with buyer's remorse?
After the massive gains we've seen to date and more on the way
for Friday's open this is a tough one to call. Will the Dow hit
11,000 and the COMP 2,500 without looking back? Will they both
retrace several-hundred index points next week on the customary
post-expiration decline? Market Sentiment has no idea and we are
not alone.
Dead Bear
Just like that, the bear is over. Sounds good to us: we've long
been on record wishing for a years' long rally to begin any time
now. Hopefully this is it. Traders who are absolutely sure the
bear is over can't wait to load up on techs and relive history
once again. Sell-off is over. Next stop: new market highs.
Those of us who've followed the markets for a year or ten can't
help but reserve some fear. No matter how good this feels there
are some long-term challenges that beg for reservation. The
thought that most companies will return to prosperity great
enough to warrant the recent ramp up in stock prices is dubious.
Keep in mind the greatest company on earth right now remains
General Electric and their CEOs have both recently stated that
they see no signs of any improvement in the economy this year and
are preparing for the worst. Right on CNBC they said that but it
wasn't repeated near-often as Abbey Cohen's year-end market calls
have been. Don't feel bad if you missed it; there were no repeats
of those clips for some odd reason.
Dead Ahead
Let's not dwell on unemployment issues, a fragile US dollar or
any other distant macro economy factors. Why don't we worry about
Friday and next week first?
Our guess is the rally begins at the bell, pulls back once or
twice if we're lucky and roars higher into the close. Easy call
to make as that's been the M.O. these past many sessions. When
Nortel and PMCS can warn, release dismal earnings and commence to
rally we know that all sense of reason has been abandoned and
it's time to jump aboard for a quick ride.
But next week will arrive and the week after that. Massive gains
appreciated in the markets now find us quantitatively overbought
and growing into quite a "long squeeze" tinderbox. What's a long
squeeze? Early buyers enjoying significant gains begin to sell
and one by one, many of the recent investors scramble for the
exits to lock in their smaller gains. Remember, most of the heavy
volume arrived later in the move as it always does.
And so we shall retrace, probably at a pace fast as prices first
went up. A stable market would take its time building a base and
accumulating supply at all price levels up the scale. This is
what creates strength in the base. Markets that rise on huge gaps
and pops are vulnerable to retrace in exactly the same manner.
So trade the daily trend with care. We could be, should be and
hopefully are out of the bear market woods but that doesn't mean
trees grow to the sky. Those that missed upside entry points over
the past explosive week should get their chance to do so safely
and soon. |
