So far so good, but it’s still way too early to be patting ourselves on the back. Yesterday we shorted the E-mini S&P contract at 1229.50, a single tick beneath what turned out to be the intraday high. In my commentary I had referred to the target as a “groundhog pivot,” since I believe it is capable of telling us whether the stock market is about to enter a bullish, spring-like phase, or alternatively, to resume the secular bear begun in 2000. If the former, then the bull should make short work of the pivot, surpassing it decisively either today or tomorrow. However, if the pivot continues to act as a cap on the rally as it has so far, then we could conceivably be witnessing the end of the cyclical bull market begun more than two years ago.

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In any event, I offered the rally target as an opportune place to get short. My goal is not to secure bragging rights for having predicted a major top to within a tick, but rather to provide a low-risk entry point to those of you who believe, as I do, that the stock market is long overdue for a selloff, perhaps a very severe one. However, I must caution those of you who seem elated by yesterday’s paper profits not to get your expectations too high; for long experience has taught me that the louder a guru’s prediction, and the more specific it is, the less chance it has of being right. By those criteria, odds are still remote that 1229.50 will prove to be a bull-market top.

A Parlor Trick

That evidently hasn’t stopped some of you from counting your chickens. I received a few e-mails yesterday from subscribers who are feeling ebullient about, if somewhat mystified by, the accuracy of my forecast. I should tell you straightaway that it was just a cheap, hidden-pivot parlor trick, no more mysterious than the dove that emerges from a magician’s silk hat. I suggest that you ignore the trick and focus on the far more interesting fact that, even though we hit a nearly dead-center bullseye yesterday, the trade produced a theoretical profit of no more than $300 per contract (and this assumes you were able to cover the short on the absolute low tick of the day).

What this suggests to me is that the bull is running out of enticements, most particularly the volatility swings that keep traders in the game. In fact, it’s arguable that there no longer is a game – not for long-term investors, who, with the Dow at 11000, are bucking the most atrocious risk:reward odds in a generation; nor for arbitrageurs, whose limitless cleverness appears to have a limit after all; nor for options traders, who mosy surely understand that when volatility continues to shrink, the short sale of puts and calls becomes a game of Russian roulette.

No Penalty for Error

Bottom line, this market stinks no matter what one’s game is, and we are just shooting in the dark when we try to short it at this price or that. Still, as long as we continue to do so with obsessive risk management, what’s the harm? We took profits on half the S&P position yesterday, all but ensuring that even if we are wrong and the market rips higher, we are most unlikely to sustain even a small loss on the overall position. Our forays in Beazer have followed the same game plan. Using extremely tight stops of 15 cents or less, we have attempted to short the stock on numerous occasions, always at hidden pivots. We’ve been wrong about a major top each time, but this has cost us nothing, since, on some of the attempts, we were able to take partial profits when the stock initially fell after kissing our target. But even if we were to take thirty more such niggling losses, they would be very quickly recouped if and when we finally short the real top. The point, then, is not merely to “call the top,” but to exploit whatever opportunities the market gives us, always limiting risk to a practical minimum.