Tuesday, March 10, 2009

It's the Bottom because I heard it on CNBC

Driving home listening to CNBC over Sirius Satellite Radio, 3 raving reporters were declaring the bottom is in. They said the banks are in fine shape and will continue to go up. Tech's will rally. The uptick rule and M2M and the Citi news is all we needed to get the market started. The market will move up from here and the Dow could double within a year. WITHIN A YEAR!!! DOUBLE!!! DOW AT 14000 WITHIN A YEAR!

I heard it all on CNBC so it must be true. Would they actually call the bottom without it actually being the bottom? Surely not. They have never done *that* before.

I guess if you listen to these talking heads too much you can start to believe that the bank crisis is over. That Obama has overnight become a great president. That Geithner is suddenly a genious. The stimulus plan was exactly what we needed after all. That TARP was a great plan after all. That uptick rule will stop all short selling. That 10% unemployment is not all that bad. That weekly bank failures are no longer anything to worry about. It's all good.

I am going 100% long tomorrow on every 2x and 3x long ETF I can find. I now have no fear that the market will ever have another down day. I will be rich by August.

But why bother. I will get hit by not only higher capital gains taxes but also enter the 39% tax bracket and probably be hit by AMT, totally crushing all the luck I tripped into listening to CNBC that fateful night on March 10th.

So therefore, I will remain with my current short positions, 60% cash and bath in my Gold. That way I get a nice tax write off on my losses. Oh but wait! I can only deduct $3000 a year. Damn. that plan won't work either.

OK, enough of the sarcasm. I am amazed at how bullish people have become overnight really believing all the bad stuff is behind us. Truly amazing. We are no better today than we were yesterday. The Citi news was all about operational profits. No mark downs. No bad assets. It was not a news release. It was an internal memo. They can't go to the media and have a press conference of such news which doesn't really state their actual bottom line. Yet, the media jumped on it as gospel. The uptick rule is meaningless. Been done before and did nothing. And they have not decided to put it in place. They are just considering it. M2M is also just being discussed. There are so many problems with doing anything about it and will take quite a bit of beaurocracy to get it right.

All that said, today was a wonderful day for longs who stayed long throughout the day. Today did bring hope to the economy and I am all for that. But is it reality? I would like to think so, but I know better.

I do think this rally will continue into the morning. It has a lot of momentum. But I see this rally coming to a halt tomorrow or the next day based on the historical nature of the VIX but mostly based on TA. You can't have a move that big without a retrace.

The VIX went well below the 20dma ending a 15 day streak. It won't just bounce off of this and go back above the 20dma. It may take a day or two or longer. But what is interesting about this big move today is that with the VIX a full 3 pts below the 20dma, And the PCR well above its 20dma, this is creating a convergence situation which can soon lead to a powerful reversal.

The chart below shows the VIX and the PCR converging. It represents we are close to over optimism. It is not there yet but very close. Notice also on the chart the lower trend line. The VIX has touched this 3 times over the last 2 months and each time it touched, the next two trading days resulted in a 30-60 pt drop in the S&P. That's right, 30-60 pts within 48 hours each time.

It is not completely clear yet what will happen in the next day or two, but if I were to guess, tomorrow morning will continue the rally. S&P getting to perhaps 730. From there, the VIX will go below the lower trend line and overly optimistic convergence will kick in causing profit taking and we will see a move down. Sometime in the next day or two, the S&P slides back to the 700 range. But I believe the rally will still have some legs as shorts take some profits and probably anticipation of the M2M meeting. This could bring the S&P up to 740 and the VIX will be at the lower trend line once again.

From here, I think we have a wonderful shorting opportunity. I see yet another reversal and the VIX moving back past the 20dma continuing the current downtrend.

Watch the VIX hitting the trend line which is about 43 and the S&P hitting 725-730. Would be a signal to take profits for longs and an entry for shorts. Be nimble though since the reversal probably won't go to low. Longs taking profits will be willing to re-enter at a lower price to try again. So The VIX getting near the 20dma and the S&P around 700 may be another signal of another reversal.

I wish I had paid more attention to the options action late yesterday. It was initially a concern of mine but I discounted it and I should not have. It was a signal that we had some divergence and there were some heavy hitters in there. I hope shorts hot stops set to avoid a big loss today. If nothing else, today taught you why stops are so important. It is days like this you pat yourself on the back for setting stops.

Good luck and do your own homework. And that doesn't mean listening to the loud mouth on CNBC who reversed his bearish outlook yesterday into a full bullish mode today.


Watch for GOOG to get to 320. A super short opportunity. I will be all over the April puts at this price.

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