For the fifth straight day, bears grabbed hold of their own scrotum and yanked it as hard as they could. The result was a 200-point short-covering rally that put the Dow within easy distance of all-time highs achieved on the final trading session of 2013. It will probably take a few weeks for the news media to reverse the bloody tide of downbeat stories they’ve spewed in the last few weeks. But with some help from screaming stock prices, it shouldn’t be long before we are reading once again about supposedly boom times around the world. Assuming business writers pick up where they left off a month ago, when the music stopped, it’ll be with stories about how investors are flocking to, of all places, Spain, the apparent “in” spot for bargain hunters.
Despite the foregoing, and reinforced by gut feelings, I’ll be inclined to try shorting again at whatever juicy Hidden Pivot rally target materializes just above December’s highs. Let me explain. It’s safe to assume that gutting and disemboweling bears, as has occurred these last few days, will not suffice to quell demand for stocks. A more fitting top for the five-year bull market would be one that sets up bulls for equal devastation. And that is why I favor the bull-trap scenario of a stock market imploding after it has rallied to a marginal new high. Bulls would be “all in” at that point, and an avalanche commensurate with the scope of a global deflation that has been gathering irresistible force could then commence.
Fortunately, we have a substantial paper gain to play with from a short position initiated by subscribers before stocks plummeted in January. A chunk of the theoretical profit ($1920) was deployed buying some DIA puts last week, but we took our lumps exiting that position yesterday on a stop-loss. The $288 loss still leaves $1632 of ‘house money’ to play with, however — money we can use to buy another load of puts at the next promising peak. In the meantime, I will continue to advise trades from the long side whenever a rally looks like easy pickings.