Although it was no trick to see yesterday’s Fed-induced short-squeeze coming, it took imagination to anticipate its rabid ferocity. We had advised shorting into any buying panic because it was bound to end with the question “Okay, what now?” hanging over Wall Street. And so it has, probably, even if it takes a few more days for the lack of a satisfying answer to that question to touch off an avalanche of buyer’s remorse.  It might even take another bloody short-squeeze like yesterday’s to set up a proper selloff, since the Dow Industrials will not be ready to do the Right Thing – i.e., a 10,000-point death spiral – until the very last ounce of panic-induced buying has been wrung from the bears. Assuming any still survive.

We dodged the bullet ourselves after coming in short Citigroup yesterday with some October 45 puts that had been acquired near the top of Friday’s rally.  When we bought the puts, we believed our timing to be perfect, since entry came when Citi shares were topping just pennies from a promising Hidden Pivot rally target.  Our position did become briefly profitable when Citi fell hard on Monday, but we should have learned by now that a day or two’s respite is about as much pleasure as bears are going to get from this now 25-year-old bull market. We exited the puts early in the session for about what we’d paid for them, intending to reshort the stock at higher prices. By day’s end, however, Citi was looking so feisty that we let the clock run out without shorting anew.

A Psychotic Lunge

That doesn’t mean we’ve changed our minds about the stock market being an historical short sale somewhere near these levels. But we are not about to simply “lay ‘em out” willy-nilly and let nature takes its course. Instead, just as we’ve been doing all along, we’ll continue to pick our spots, initiating shorts whenever it is possible to do so without risking more than nickels and dimes. We have yet to get our hair mussed even once in these attempts, and we aim to keep trying as long as betting on stocks’ return to the mean continues to offer such enticing odds.

In the meantime, we should view yesterday’s psychotic lunge, not as an indicator of impending economic strength or of recovery in the housing sector, but of the stock market’s most deeply ingrained pathologies. Manifestly unable to discount a crumbling economic picture, shares continue to hover aloft, waiting for some world-changing dreadnought to strike. We can only hope that we’re short the night before it happens, since selling stocks after the opening bell will be like trying to unload bulging cans of tuna in the wake of a botulism scare.