Hard to know why stocks were so feisty yesterday. Perhaps it was the world-shaking news from the Hollywood – that a new actor has been chosen to play James Bond (a blond (!!!), the “news” media breathlessly informed us), and that Stallone is gearing up for Rocky VI (!!!!!!). Then again, perhaps it was just an extremely oversold stock market doing what comes naturally. Every guru and blogger who follows the action on Wall Street seems to have nailed this rally, even the technicians with a somewhat bearish mindset that I hear from regularly.

(Click on chart to enlarge)

I don’t expect much from this bounce myself, but that doesn’t mean I’m oblivious to the fact that conditions are ripe for a dandy short-squeeze. With long-term interest rates rising, corporate profits facing an uphill trek and energy prices near all-time highs, it hardly shocks that bears would have gotten sold out at some point. And so, apparently, they have. If true, the effect will be to lighten supply so that shares will seem to ascend effortlessly and with increasing momentum. The bulls will pile on early in the move, scared they’re going to miss an opportunity. That will draw short-covering, which will further accelerate the move, drawing in still more panicky shorts. Before you know it, we’ll have a humdinger of a rally, one that has been gestating in what is perhaps the most fetid economic womb since the Arab oil embargo of 1973.

My guess is that few market watchers expect the rally to go very far, and most of the technicians I know believe that the downtrend which has held sway since mid-September will prevail. But at what point do we toss logic on its ear and buy the rally with both fists? It’s always a risky ride for those who play the bullish pops and fizzes that invariably punctuate a prolonged downtrend. We can afford to sit on the sidelines for another day or two, since our put positions are relatively modest. But keep your Bulletin Launchers open nonetheless, since I may signal an opportunity intraday at any time.