Monday, May 25, 2009

Summer Starts

Top Line: The market seems to have some more downside potential. The next few weeks should be soft...followed by a strong rally.

With the Dow down about 150 on Thursday with a few more on Friday, our short position has been rewarded a bit. We don't expect a lot of downside but the current situation can be a profitable one or at least a hedge against our main portfolio.

This brings us to the main issue for the day, that of being bullish or bearish. We have been bearish for many years waiting for the kind of drop that we saw last year. Once that drop occurred we became bullish and have been for about seven months or so. Now, we are looking for the first harsh drop in the market since the March lows.

This switching positions seems to confuse a lot of people. When the readership hears bearish talk from us for a long time, they get comfortable with that position and expect to hear bearish if they come back. Now that we are mostly bullish, their expectations are not being met. The public has turned bearish recently and most of these people are now stubbornly bearish. Any negative talk aligns with their thought process.

We here at the Update think that the market dictates what we should be doing. If the market is going up, we need to be long. If the market needs to go down, we will certainly be willing to go short. That is what we know best. But, that is not the only direction the market goes. We are usually the early ones out of our positions which can be a problem but we always expect being early is better than being tardy when it comes to the market. Those of you that know us, know that being late in life is one of our trademarks but not when it comes to the market.

This is the problem with following the market, you can't always be bearish. If a trader always thinks the market is going up, they will lose all of their money when it goes down, against them. With our current positions being very long, we wanted to take advantage of this short term down turn but didn't want to sell our positions. So, in our trading account we put on some short positions.

Anyway, if you read this blog and wonder why what you're hearing much different things in the main stream media, that is by design. We use the main stream media as a contrarian indicator many times. When they are most bearish we want to be bullish (generally). This can include individual items in order to get good prices for our trades. This of course is not our only indicator.

Right now the market is soft because the main stream media convinced everyone the market was safe again. When they start questioning a further rally, we will get more bullish. Until then, we will be waiting for other indications.

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