The Shorts Are “Breaking Bad” (Market Wrap Up 04/15)

The late stages of a rally feature stubborn bears withstanding more pain than they ever thought possible.  To wake up every single morning and argue with the stock market, via wagering money, will always be a losing strategy regardless of how smart you are.  Being a contrarian is fun when you can nail the top or bottom.  However,  there is a reason why Warren Buffett calls it “bagging the elephant,” and it is NOT because the elephant is standing still waiting for you to catch him.  Rather, the elephant is stomping on the ground moving all the time. Bottoms and tops are extremely elusive, almost by definition. Although it may seem intellectually sexy to call yourself a contrarian and bet your money in that fashion, it is a long term money losing strategy. Wait for an inflection point, and then ride the trend.  Simple, blue collar, and profitable.

In 2007, when the $SPX was over 1500, the idea of it going back down below even 1300 was unthinkable to most. Similarly, when the $SPX was below 700 in March 2009, the idea of a rally to 950 seemed laughable.  When we did make it back over 950 and then 1000, pushing for 1200 was just too absurd to bet money on.  Of course, all of this reasoning must have appeared, at the time, clear headed and steady.  And it was also entirely wrong.  Markets are a function of mass psychology.  When you are at an NFL game, you’re going to see people act a lot differently than when they are own their own in a foreign country.  The attorney from Great Neck, Long Island, is going to be much more humble and cautious when he is lost on a side street at night on a vacation in Rome, than when he is drunk, sitting with his buddies at a Jets game with a Dentist from Hoboken sitting behind him cheering too loudly in his ear.  The herd mentality has a powerful reinforcing effect. RIght now, short sellers are getting clobbered left and right. Eventually, this rally will end.  For now, however, the best strategy remains one of staying long, with a little more cash than usual on hand, and not much shorting, if at all.

The $SPX closed up 0.08% to finish at 1211, as it was another green day, albeit a quiet one.  As the chart above shows, we still have plenty of room to run before we can truly call this a parabolic move. I have said all along that above 1220 would be a time to seriously consider scaling out of your longs, in an orderly manner.

Personally, I remain with a larger than usual cash position and a long only portfolio.  I initiated a new position in $EPAY today, as I believe that the stock looks poised for a big move higher as it breaks out of a pennant.

$FTK was my top performer today, and you will see many more breathtaking short squeezes occur before this rally ends.