Thursday, December 18, 2008

Short Funds Need to Blow Up before the Market Bottoms



I could only begin chuckle as I think about how many Long Only and Long Bias funds Blew up and closed their doors within the past 12 months. This has obviously created some forced selling from firms who need to liquidate their positions. For the Market to truly turn around and be in the next "Bull Market", Ultra Bearish Funds need to blow up as well. When you burrow stock to short, your broker locates the stock and then "lends" it too you. To cover your short you need to actually buy back the stock in the market, hopefully for a lower price.

The situation too keep an eye on is a short selling fund blowing up due to a rally in the market that forces huge amounts of forced buying. It may sound a bit strange to hear the words "Forced Buying". For the market to truly turn Bears who shorted too much stock at the lower price levels need to feel some real pain.


For a true "Market Bottom" we need to clearly see the other side of the coin. The scramble to buy stocks needs to be as intense as the broad based selling that has occurred over the past 12 months. Until then the Bears will continue to sell Rallies and maintain control of the markets.

But would this short blow up even make the news? I highly doubt it. No one really complains when stocks go up.

When will these Government and Stimulus Packages End?



What the Hell is going on here? When will these government Bailouts and Stimulus Packages end?

The Fed has expanded their Balance sheet from 800 Billion Dollars less a year ago to 2.2 Trillion Dollars today. The Fed has slashed interest rates to a new target of 0% to .25 % the lowest in its history. The talk of systemic risk and avoiding the collapse of the entire financial system is the justification used for government intervention. That sounds reasonable enough. Who wants to see the entire financial system and economy collapse to bring about "The Great Depression 2".

The economic situation is calling for every industry to reach out and seek government help in what has become a race to convince the government why they need money, and exactly how much.

President Elect Barack Obama has called for a massive new stimulus ranging from 700 Billion to even up to a staggering 1 Trillion Dollars. The Strategy of racking up debt to stimulate businesses, consumers, credit and the housing market is what the government is relying on.

This leaves many questions unanswered. First will this actually work? What are the long term consequences of such a monetary policy? How will hitting the printing press and creating new money affect the value of the US dollar? What are the real costs of this monetary and stimulus to the American Tax Payers? For every Dollar of this Stimulus how much actually goes towards the intended purpose? How are the government agencies going to be held accountable for the use of this money? How is the Government going to promote entrepreneurship, innovation and prosperity by giving money away?

Finally the question no one wants to ask is: What happens if this does not work?

Trading Range

I really don't have much to say about the current market. The Trading Range seems to be firmly established at 800 to 900 ish on the S&P 500 Index futures and 8,000 and 9,000 ish on the dow jones.

I am not really suited that well to these types of markets thought I try my best and I am always getting better. In the mean time I get chopped around make a little money and lose a little less trading options.

Trending markets tend to allow my profits to run a bit further. My inclination is that we start towards S and P 1000 and Dow 10,000 into the last days of 2008. We shall see what happens.

If these indexes fail resistance I will look for shorting opps. If they keep moving up I am going to stay "cautiously bullish".