DaBoyz seized bears hard by their scrota yesterday, hoisting stocks as high as possible in anticipation of the next all-but-inevitable cascade.  We fought the tape all day long in the chat room, reminding ourselves as stocks rampaged higher that there still looms for America a debt deflation, a real estate implosion to rival that of the 1930s, and, most immediately, a recession that almost certainly has begun but which has not yet shown up in the baffling statistics that Uncle Sam puts out each month. 

Thinking about such things ahead of yesterday’s rally was what kept us adamantly in harm’s way during the day.  And while we were able to reassure ourselves that the rally was nothing more than a routine short-squeeze in a heavily oversold market, we realized by day’s end just how completely the world’s worries can melt away when stocks are forging relentlessly higher, even without good reason.

(Click on chart to enlarge)

By day’s end, discretion having prevailed over valor, we had spread off our Citigroup puts against some at-the-money QQQQ calls. This is a backspread position, and it will work best if Friday’s option expiration keeps the stock market well spooked for the next few days.  We won’t mind one bit if our December Citi puts lose 95% of their value, so long as the offsetting QQQQ calls keep rolling higher. While the puts lost a little more than half their value yesterday, falling from 1.65 to 0.80, the worst they can do now is fall the remaining 80 cents to zero. The calls, on the other hand, can keep rising with no theoretical limit, and even a modest rally from here would more than pay for a total loss on the puts.

As for the stock market’s needing “good” reasons to rally, we should never lose sight of the fact that it is invariably “bad” reasons that drive the most powerful uptrends. That’s because, while merely bullish buying is a function of optimism, short-squeezes are caused by unmitigated panic. Because of this we can infer that it is not bulls who push stocks through heavy layers of supply, but bears who have been caught in the ringer. It also follows that the buyer of shares at the very top of a parabolic rally will almost invariably be the bear with the most guts, the most conviction, and even the most common sense -- but, alas, pockets that are never quite deep enough.