Wednesday, August 06, 2008

The Nearly Extint Rallyasaurus Makes an Appearance

The markets rallied sharply yesterday on the back of weaker oil prices and the idea that the Fed is going to leave rates alone for sometime. Again this shouldn't have come as a shock to anyone, the Fed is not going to make any dramatic moves right now in the face of an election. I know, the Fed is supposed to be an independent entity but anyone that has watched their moves over the past 10 years knows that they are anything but independent.

Oil continues to weaken on concerns that prices are causing demand destruction (true) and funds continue to unwind their long oil trades (true and more important). I'm not a technician but oil looks like it has further to fall from here.

So, if none of this was "news" why the big rally? Well, that's where the psychology of Wall Street comes into play. A lot of money on Wall Street is run by people that are happy to get the last 30% of a move. They think they know what will happen (a Tuesday market rally), but they aren't sure, so they wait and wait and wait, until the market has shown them some conviction and then they buy with two fists for the rest of the day.

Days like that tend to be followed with a sell-off so if today starts a little weak look for a triple digit decline by the end of the day.

Yesterday's action is in keeping with our summer thesis. Business is awful for almost everyone, but stocks look like they are going higher for the next month. Long the market and short oil is a pretty good trade for the next two weeks.

There should be a nice opportunity to short the market again after Labor Day.

***** Disclosure - I'm talking my book b/c I'm long the mkt via S&P and QQQ and short oil via DUG (up 45% in 2 mths).

No comments: