Monday, October 13, 2008

Get Out Your Rally Monkeys....

The futures are still pointing to an explosive rally at the start of the day. A couple of quick observations:

1) This rally seems to be based on the European plan, as the US has not made any material changes in it's bailout plan. We may make some changes to our bailout, but as it stands right now, the US plan is still inferior to the European plan.

2) The magazine indicator - There is an old investing philosophy that says when a trend gets picked up by mainstream media it's usually a top or bottom of a market. For example, consider this Time Magazine cover from June 2005.

Given the manic swings in the market recently I don't think the magazine indicator is as valuable as it was a couple of years ago. Today, I'm using the CNBC indicator. EVERY Money Manager on CNBC is calling a bottom and claims that this is the time to buy stocks. In general, that's not a good sign - you want to be on the opposite side of these guys most of the time. I think today is going to be a very weird trading day because of the partial holiday. A lot of smart money is going to use any big rally to reload their short positions (I was market neutral until Friday when I went long. I'll probably go short again if we go up 5-10% in the next couple of days).
The key question is - How has the economic backdrop improved from Friday morning?

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