Saturday, February 13, 2010


Deflationist can and have offered up countless reasons for their view. I suspect most are trying to rationalize a short position in the market. But I have to ask is it really worth the risk?

Let's face it if you managed to catch the exact top and covered at the exact bottom last Friday you would only have profited 9.2%. And realistically I doubt anyone has managed to catch more than 6-7% of the decline. In the last two weeks the HUI has tacked on 11.8%.

One is never going to get rich on the short side of the market. Especially not in a cyclical bull. (It is an excellent way to get poor though.)

Now we've got a multitude of factors starting to line up in favor of the correction either being over or very close to being over.

Sentiment has reached bearish extremes, some even worse than what we saw at the March `09 bottom.

The yearly cycle low for stocks is due anytime now (and looks like it may be in).

The market has rallied in the face of extremely bearish news this week. Never a good sign for shorts.

The dollar's intermediate cycle is due to top any time now. Sentiment on the dollar has reached bullish extremes last seen at the March `09 top. And commercial traders now have the most bearish position on the dollar in the last 9 years.

Commercial traders now have the most bullish position on stocks in the last 18 months.

The expected 10% decline separating the second leg of the bull from a probable third has more or less occurred.

The fundamental picture hasn't changed. The Fed has flooded the world with liquidity and despite tough talk, has made no attempt to withdraw any of it.

Finally we are starting to see institutions coming back into the market.

With all these factors lined up against the bears and with the relatively small gains possible on the short side compared to the long it's probably not the best of times to continue holding short positions.

Now of course if one doesn't believe in the bullish view they certainly don't have to go long but it would be much safer at this time to at least go to cash than to continue holding shorts. The odds are starting to pile up against the bears and it's probably just not worth the risk for a minimal gain even if the bear still has one last roar.

Heck even if we have somehow entered another cyclical bear (doubtful) all the factors I've outlined above should lead to a violent bear market rally.

The only two rational options right now are long or cash. Pressing shorts at this point is tantamount to gambling, and if one wants to gamble you can find 24 hour action at any casino. There's no need to wait for the stock market.