Friday, February 05, 2010

Bears Fail To Knock The Market Lower

I'm glad that I waited until the close to post today's market commentary. If I had written it earlier, I likely would have talked about the market being down again, and the fears of sovereign debt in Europe overshadowing everything else.

But a funny thing happened on the way to the bears' happy hour today, they failed to keep the market lower, and we saw a strong rally into the close. For those who have never traded from the short side, it is hard to put yourself in the bear's mindset. But trust me, they have a big agenda to push things lower and pad their returns.

Take the credit default swap (CDS) market for example. This market is relatively easy to manipulate, and make prices spike higher. This looks like what has been going on with the Greece and Portugal CDS, and it has caused investors around the globe to panic. The same playbook was used in 2008 against Lehman, Merrill, AIG, etc, with great success. So why not trot it out again?

I'm not saying we should shrug off the debt concerns of developed nations, but just that we shouldn't overreact to what could amount to a temporary and induced markup in CDS securities.

When the bears couldn't keep the market down today, shorts started to cover and buyers piled on to cause a sharp snapback rally. Given that the market remains very oversold, bearish sentiment has risen markedly, and the market has been down for 4 straight weeks, I expect the markets to bounce next week.

In economic news, although nonfarm payrolls fell by more than expected (-20k vs. +15k consensus), I think the fact that the unemployment rate ticked down to 9.7% should make for pleasing headlines in the newspapers.

Overall, I see a relief rally developing, which you might be able to play for a trade. Most people still expect the market to dip again and make lower lows, but I am beginning to think that our next trip lower might not break today's lows, and that would be a bullish development. Patience.

Thanks for reading, and have a great weekend--


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