jaudio shorts

Congrats Bulls, you won this round.

With my portfolio taking a hit after the FED decision, one would think I would reverse my pessimistic view of the market and get on the bandwagon. After all, the market is now cured of any problems and we will soon be breaking Dow 15,000, right?

Wrong.

After the FED decision, I was caught in what is called a "bear trap", that is, I was heavy on short ETFs believing in a downward trend and the market started rising, hitting me with paper losses. I was a bear trapped in the uptrend. Once the decision came down, there is no doubt that the big players that were on the short side of the market desperately covered their short plays, adding fuel to the rally fire. What really surprised me is that the market didn't gain 1% - 1.5% more than it did. Seemingly caught in the bear trap, it looks like it is time for me to throw in the towel.

Not so fast, trader Joe.

The underlying problems in the economy do not get erased by a FED cut.

The traditional market inflation indicators, gold and oil, are on the rise. We all know what high energy prices mean to businesses that rely on transportation of goods--which is every business directly or indirectly. Commercial paper isn't out of the woods yet. Regardless of the cut, there are still many people that will lose their homes because they took a teaser rate that has reset on them. (If it only could have reset back to 1% maybe?). Employment is slowing down. Record dollar amounts of stock were bought on margin during the summer. The list can go on and on. For each of the above negatives, there are ways to see how each do not present a problem when studied on an individual basis.

I see the classic markings of a bull trap.

A bull trap is the exact inverse of the bear trap. Those that are buying today are betting on an overall market uptrend, and if the market takes a tumble downward, they are stuck with losses when buying high. What happens when more numbers come in showing many companies missing earnings projections? What happens when the unemployment rate ticks up just one tenth of one percent? What happens when the CPI and the PPI don't give us favorable bull market numbers?

Is this market a bear trap or a bull trap? Only time will tell, of course, but in the meantime I tip my hat the bulls on the win and await October, my pre-planned time to drop my 15% cash holding into more short ETF positions.

October surprise, anyone?

Comments: View Comments |  Thursday September 20, 2007