Unabated Irrational Exuberance

The title says it all. Listening to the pundants, is there any chance this market will ever go down ever again? All you hear from this high school-ish reports from the so called experts is this market will continue to go up, banks are not only solvent but highly profitable. Copper will never ever go down and will pass Gold in price and as the international standard. OK, I am kidding about the last comment, but come on, listen to these people. This sounds like the Internet bubble all over again. Calling for higher highs, huge advances and telling shorts to get out of the way.

When everyone gets greedy, you get fearful. Everyone is greedy right now. The shorts are being squeezed and all the media is now a perma-bull.

So, what to do. First, use experience. Markets don't go straight up or down. While the market does show strength, moving heavy onto the long side is a retail investor mistake. I think the play right now is to sit out or lean to the short side. For me, I am leaning on the short side with SDS. I won't touch financials right now other than some select puts but it appears a nice hot-air bubble is being created.

What amazes me the most are the pundants who are completely convinced the banks are not only profitable, but grossly profitable. That their troubles are all behind them and no gov't help is needed. The toxic assets are completely gone. Just vanished into thin air.

Believe it if you want. But I am telling you that until unemployment slows dramatically, there is no turn around. 610K more jobs lost in the last report. That is HUGE people! I don't care if it is less than expected. It is huge. Many say unemployment is a trailing indicator. Bulls**t! (excuse the snap language). Unemployment is very much a leading indicator in a recession period. Every job lost means future less retail spending, more credit defaults, potential foreclosures, more gov't spending, and less taxes being collected by local gov'ts.

Did I mention local governments? State governments are headed for bankruptcy. This is the next shoe to drop. The Fed will need to focus on bailing out states. There is no way states like Florida, California, Arizona can withstand the unemployment numbers and the losses that come with less income taxes, less property taxes, and less sales tax. It will result in job cuts within the gov't itself causing a faster rate of unemployment.

I am very comfortable with my positions right now. I made no trades today (I avoid trades on OPEX) and very few this week. I am not willing to play the financials as a whole. I have some BAC puts but that is it. Financials are creating quite a bubble and it is probably a great gamble play for some of you but there can be huge gains or losses along the way.

TA clearly shows we have hit the upper trend line and 3 things can happen.

1. We can break through and the market has a free ride to about the 950 range
2. We can fall back to the lower trend line and break through looking for at least a 30% retrace
3. We can continue in the narrowing range.

I don't think #1 will happen although it if does, it is not entirely surprising. #3 is highly unlikely because the narrowing range has gotten extremely narrow and it has to break through. So my odds on favorite is #2 and I am playing it that way by playing SDS and SRS and also puts on FAS. I am well hedged in case of a sudden burst upward. I am also being somewhat defensive with holdings in GLL, TBT and EEM (OK, not defensive, but somewhat safe and diversified a bit).

One thing to note, a lot of stocks and indices are moving very close to their 200 day MA. This may be significant. They can bounce off or they can break through. A breakthrough would likely destroy any remaining shorts. I bounce off could result in some consolidation in a sideways move or could run the recent longs out via profit taking.