Big Selloff Just
Cat and Mouse
For edition of December 12, 2007Whooooosh! A little disappointment brought stocks down in a huge hurry yesterday. Permabears shouldn’t get their hopes too high...er, low, though, since the nearly 300-point fall in the Dow didn’t violate a single important support on the daily chart. In fact, we’d be surprised if the mass mental illness that drove shares to near-record highs in the first place did not reassert itself with a vengeance as early as next week. Remember, free-falling selloffs such as we witnessed yesterday are engineered by buyers, not sellers. The latter played a mechanical role, of course, but it is the specialists who determine a price at which they can feel blissfully confident about unburdening the panic-stricken of their unwanted stock.
The gutsy trader could have made a years’ lucre in mere minutes if he had guessed right about the size of the rate cut that was coming. Hours before the Fed announced a 25-basis-point gift, Wall Street appeared to be betting that it would receive an even more accommodating 50-point cut. How could you tell? Well, the shares of Citi, for one, rallied off a morning low and kept going, accelerating to the upside until the moment of the announcement. We’ve always considered Citigroup’s price action a peerless indicator of what the sleazy money is doing, so deftly is the stock manipulated on a day-to-day basis. In this case, though, the buyers appear to have guessed wrong. We say that having guessed wrong ourselves. Assuming Citi’s accelerating rise yesterday to be predictive of a 50-point cut, we loaded up on call options with the intention of selling them into a rally spike. Instead, the stock dove so sharply on the news that bids for our calls melted away before we could get off a closing sale.
Rally Fed Speculation
In retrospect, it seems obvious that the rally in Citi fed on itself. The higher the stock went after bottoming two hours into the session, the more it appeared that “somebody” knew something. At least, that’s what we thought. We also thought that when the news finally came, Citi would spike precisely to a Hidden Pivot rally target 50 cents above where it was trading at the time. In the end, though it was greed more than anything that undid us, for we had precisely anticipated yesterday’s reversal via the following note disseminated to Rick’s Picks subscribers on Monday night, under the heading “Bull-Trap Alert”: “All signs point effortlessly higher, so be prepared for the opposite, possibly coming as a reversal off Fed news. My gut feeling is that the expected easing has already been discounted to death, which could set up a potentially nasty bull trap today.”
And so it went. But like so many others, evidently, we thought we could squeeze a little more mileage from our bullish bet, even at the risk of being dead wrong. And now, as noted above, we expect investors to come back to their senselessness, bidding stocks to ridiculous heights yet again in the weeks to come. Will Mr. Market outsmart us this time by falling ceaselessly till summer?
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