As we wrote yesterday [l">Make or Break Time for some ETFs - China Ignoring News as Well]
After such a large move up in a short period of time - a healthy action would be a retrace to S&P 870 or 840, some consolidation sideways, and then a new leg up for a final Santa Claus rally.
So we have our first pullback to S&P 870. So far the action still has been "healthy" but I find it hard to trust anything in this market. If we are indeed in a new "mini bull" (within a bear) phase we want to see this pullback bought hand over fist as Santa Claus gets his game on and we embark on the "rally into year end" nonsense. If we break below S&P 840 all you will find in your stockings are empty cartons of instant Kool Aid. It's actually quite an important time here for the markets, as the only way people like me will trust any move is if the lemmings buy all these dips - then we'll join in and sing Ho Ho Ho as well. I'm watching the reaction to these levels very closely. Still in high cash and not trusting of anything in this market, but as we noted yesterday we began rehedging with Ultrashort Real Estate (SRS) (now up 30% on the day) and Ultrashort Financials (SKF) (up 16%). Volatility remains insane. We don't have to "predict" just "react" in this market. We have a 50/50 chance to go either way in my opinion - depends if we go down the hope route or reality route the next few weeks. I still think hedge funds "want" to mark up this market late in the year to make their performance look better than it is.
If this is a "buy on pullback" time instead of "ah just kidding about that suckers rally" moment, we'll look to buy some of the things working of late like infrastructure, China, and the like. I'd rather buy on a strong push north of S&P 900 however - this would show me buyers are real and it's more than quant hedge funds playing a "theme" for the day/week. Honestly I'd like to see us get over that ugly red line to believe in any of this fairy tale.
Open question: how do we rally on late cycle (infra, commodities) when early cycle (housing, banks, retail) has not yet rallied? Now we are going to reverse the business cycle? Only in the casino....
Long UltraShort Financials, UltraShort Real Estate in fund; long UltraShort Real Estate in personal account
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