With the Dow Industrials up a whopping 1167 points on Tuesday, we need to remind ourselves that the rally was a fraud, driven mainly by bears scrambling to meet margin calls. Indeed, the binge was impelled every inch of the way by short-covering. The saps who bought into it are certain to regret it — soon, and in a big way. Mr. Market always makes sure of that. His purpose is to make it extremely difficult for bears to rack up a big score even though the collapse they’ve patiently awaited for years is finally happening. The flip side of Mr. Market’s cruel plan is to trick bulls into staying fully invested the whole way down. What fools!
But we would be foolish ourselves to underestimate the power of short-covering rallies, especially if stocks have actually entered a major bear market. For it is our doubts and skepticism that will fuel the rallies, along with a persistent failure to imagine how far they can go. How do we compensate for this in order to avoid getting trampled in the next buying stampede? For starters, by accepting that the surge will not end until those of us who have experienced enough bear markets to know how very devious the countertrend moves can be are convinced that “this one is for real.” When even hardened skeptics have thrown in the towel, that’s when the market will be ready to turn south again with a vengeance.
No Great Trick
Since few of us doubters will have the guts to go against the churning in our stomachs at the crucial inflection point, I’m going to suggest an easier way: follow Apple shares. Do this with discipline and diligence and you cannot go wrong or be fooled. AAPL is the best proxy we have for the institutional mindset that still rules the markets, and the stock will move with the kind of bold certitude necessary to lead every spurious charge. Get AAPL right, and you will get the market right. This has been no great trick during the bull market, and as the dot-com crash and the financial collapse 0f 2007-08 taught us, it will be no more difficult in a bear market. Stay closely tuned if you prefer trend calls without errors.