Slope of Hope Blog Posts

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Always Fighting Our Last Battle

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About a year ago was the single worst trading day of my entire life.

The day was September 1, 2010. I came into the day 135% committed and entirely short. In other words, I had used all my cash and an additional 35% in margin buying power on a huge quantity of short positions. The market pushed higher all day. I was deer-stuck-in-headlights shocked, and I bear the mental scars even now from both that day and the months of QE2-inspired upswing that followed.

I thus view Jackson Hole 2011 with no small amount of discomfort. What really killed me last year was the notion that the head and shoulders pattern (that everyone – I mean, even the likes of Cramer – was talking about) was going to precede a big drop in the market. On the contrary, things flipped higher and didn't look back.

The easy assumption is that Bernanke will QE3-ize the environment and, just like last year, the market will shoot higher. I was reviewing the posts from last year, and I was surprised to recall that the market actually fell last time after Bernanke's speech. In other words, the big push higher didn't take place until several days afterward. So the idea that we're "in the clear" a few moments after the text of the speech are released Friday morning is simply untrue.

Looking at the post from the end of that awful day, the amazing thing is that the market wasn't even up that much. The killer was the level of commitment. The devastation I suffered was so horrendous that, in a later post, I actually wondered out loud if I was dead wrong. Just take a look at this quote:

"what if I'm wrong about the economy? What if all this government intervention, in the end, turns out to be a brilliant stroke, and it really does set the economy on the road to a robust economy complete with healthy, growing earnings, growing employment, and worldwide prosperity?"

Well, it seems pretty clear I wasn't wrong, but it didn't matter a whole lot. Jackson Hole commenced a nine-month puke-fest of rising prices which just about killed me. The market then spent nearly the next three months farting around and whip-sawing everyone, and only during a few weeks that followed did reality reveal its beautiful self again.

I guess what's disappointing to me is to realize (through research, since I had forgotten) that Friday morning doesn't mark some kind of milestone for us. It won't be like the unemployment report or the FOMC announcement whereby the market will figure out its direction with a couple of hours of gyrations. No, if last year is any guide, it could be days before the market gets its bearings.

So the reaction Friday will frankly not really help any of us. If it lurches down – – well, it lurched down in 2010, and the bears got butt-hurt for months on end afterward. If it lurches up, well, God knows what the means, although a push to 1250, I continue to maintain, might be the greatest gift from God to the bears in history.

So I guess in reviewing the various posts leading up the That Awful Day, it has actually imbued me with some additional caution. I am, as I type this, 47% committed, and purely short, but I don't think I'll get aggressive until at least the middle of next week.

The charts that I'm closely following fall into two broad camps – – one smallish camp are those that seem appropriate to short right now (and, thus, I am short them); another large camp are stocks which have a long way to run before they are safe to short. That gives me a muddy picture, since it either means the market is going to start falling again next week, and the beaten-down stocks are simply going to get uber-beat-down; or the market is going to rise, which means the shorts I have now are totally premature.

The two sectors that I am seeing the most potential for weakness right now are Real Estate and Energy. The sector that seems to have to most room to run higher is Financials.

I will say this, however: no matter what happens with Dr. Bernanke, my faith in a ferocious bear market in the coming months is stronger than it has ever been. I think it is simply impossible for 2012 to pass us by without a devastating worldwide economic calamity. The only thing I don't know is whether it is right in front of us or if we have to suffer a QE3 rise in order to partake. This uncertainty compels me to remain cautious for now.

Thus ends my ramble. Thanks for your patience with me.