Wednesday, July 21, 2010

Bears Should Be Nervous - Bulls Should Be Terrified

A couple of very interesting days. A couple of days that probably have most investors a little confused. Whether they know it or not, I think bears should be nervous right here. You have Bernanke speaking tomorrow, not alot of economic data this week reinforcing the economic double dip in progress, and the European bank stress test that will be released Friday that will for sure paint the most rosy picture possible. It is very possible the market could shoot higher multiple percentage points for a few days. In fact, I have been the most active I have been in weeks covering shorts especially yesterday and some today. The weakness in the morning has given some opportunities to prune some positions. Some of these positions were puts that were re-initiated at the end of the day extending out the duration. Overall I am less short than I was two days ago but I remain on a trigger finger. This leads me to the thought that I think bulls should be terrified.

I think starting next week, the ugliness could return with a vengeance. My focus shifts from market indicator to indicator. Today the sell off did not feel right at all and I was covering some of my short duration puts early in the morning. The short term indicator I was focusing on was copper and the volume related to the gap down. Copper never moved down. It was positive all day and than started skyrocketing very early in the trading day. The longer term indicator I am looking at is the Euro. My gut tells me the Euro has topped or is very close to topping. The last couple of days the Euro has stopped its upward climb trying to chop higher above 1.30 before each time failing and getting slammed back down. There could be another spike but I really think these bank tests are going to be buy the rumor sell the news type of events. Hungary is having problems even though the market is ignoring it currently and overnight rates continue to indicate stress. I think the bulls are protected by the stress test to some degree because I don't think the market is going to plummet before it but the next big leg down I think will be because of Europe and I think the clock is ticking. Any bear hoping for an earnings miss to help cause a market sell off is looking in the wrong place. If earnings could perpetuate what they are coming in at, the market isn't that expensive. However, if there is a global macro hiccup, which I think is almost a certainty, earnings are leveraged like never before. So the bears have to be looking forward and outward. Maybe the market can hold it together longer than I think but the clock seems like it is ticking. Tick tock tick tock.

Anyway, look for a potential spike for the rest of the week into next week blowing out some shorts and establishing a bullish bias. If (and that is a decent if) we get the spike look to take an aggressive swing anywhere between 1110 and 1150 on the short side.

The most immediate bearish scenario I think centers around Bernanke testimoney tomorrow if he his words start sounding more downbeat than investors would like to hear.

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