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Will We Rally Before it Gets Ugly?


While it was time to be bearish this summer, the pressing question is whether it's still right to be bearish now.


Editor's Note: The following appeared on our Buzz & Banter before the opening and we share it with ye faithful for the benefit of the Minyanville community.

  • In today's opener, we openly wondered if the time to be bearish was this summer when the writing was on the wall. The answer, quite naturally, is yes. The more pressing question is whether it's still right to be bearish in here.

  • This is something I've pondered since yesterday, when I covered the tag ends of some small shorts into the drek and drekkier headlines. It seems that everywhere you turn, from BusinessWeek to the Economist to the daily rags to TV, stories on credit, housing, subprime, the dollar and weak retail sales are breaking news.

  • When something is so obvious, after such sharp moves (financials -18% in two months), you've gotta wonder if it's too obvious.

  • I've been wary of the wobble for a long time and the pressures have been cumulatively building since the back of the tech bubble. This I know and this, Mon Frere, I respect.

  • Still, there are alotta tradable twists and turns on the way to our final destination. Sorta like the large intestine, which I would use as an analogy if it wasn't such a nasty visual. Wait, am I saying this out loud? The caveats of literary turrets. Mea culpa.

  • I consciously passed on buying the close yesterday, thinking to myself that I'll have the chance to buy the dip today if I so choose. When I walked into the gym this morning at 6:00 AM and saw the jiggy futures, I felt even stronger that I would have that chance. The gap opening wire-to-wire run last week notwithstanding, the probe lower (from the lofty levels earlier) seemed intuitive.

  • So, following that first probe lower, is it time for Hoofy to step up for a trade? While possibly, although I told him to shape his risk and craft his profile. How? BKX 90 is a decent level, as the banks led us lower and must hold here if there's a tradable upside play.

  • And DJIA 13,000 would be a boon for the bulls as, other than the tripwire at 12,800, it's the last gasp before DJIA 12,000.

  • So, with risk definition in tow---and a conscious, wary eye towards the dollar--I'm not opposed to giving Hoofy a shot at redemption into the dip. Given the illiquidity and the contagion potential, however, I would be relatively tight with my tries. This could get ugly and, truth be told, it likely will. The question we must ascertain is whether there's a tradable rally before it does.

  • What's the laundry list? Pure trades, and consistent with our defined risk in the BKX, the financials may be ripe for a squeeze (lotta risk and hence, the potential short-term reward).

  • And energy and metals, I suppose, as long as the dollar is offered (please note that I've cooled on these sectors as investments from these levels).

  • If you're looking to add to longer-term stuff, pharma and healthcare are sectors to spot but again, we're talking pure trades here with an eye towards defined risk on the downside and trailing stops to the upside, if and when.

  • Good luck and remember to be mindful. We have so very much to be thankful for.

  • Watch Citigroup as a potential upside rental with defined risk. $31 is the recent low and this could be one of those "risk a buck to make three" trades should our scenario play out.


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