Bears Get Suckered Yet Again by a Bailout

We speculated here yesterday that the latest eurobailout, a $125 billion package for Spain’s zombified banks, would prove too chintzy to ignite much of a celebration on Wall Street. As it turned out, that was putting it mildly. Once the OPM-mongering dolts who sent stocks soaring in Europe and Asia had finished jerking their knees, the party lasted for all of about 20 seconds in U.S. markets — as much time as it took for the pros to fleece short-covering bears Sunday night with a vicious gap-up opening in the index futures. The Mini-Dow shot up the equivalent of 210 points on the first bar, putting a squeeze on bears that is likely to make them think twice about going home on a Friday with open positions. The 12715 peak was as high as the electronically traded Dow ever got in this run-up; moments later, it began a 407-plunge that continued until the closing bell. Yikes!

Keep in mind that buyers covering short positions gone awry are arguably the best friends (other than a promiscuous central bank) that Wall Street has any more, since they are the only buyers left with a reason to bid up stocks aggressively. However, the roughing up they received on Monday will only add to their skittishness about betting the “Don’t Pass” line. At the very least, the 12700 area where they got sandbagged will impose a leaden layer of supply on any attempt DaBoyz make to goose the broad averages new highs.

Using QQQs Puts to Get Short

From a purely technical standpoint, however, we are not ready to write off the bull market entirely. Notice in the chart above that Sunday night’s head-fake followed a thrust that had already exceeded a key peak at 13137 recorded five years ago. The rally was therefore “bullishly impulsive,” according to our proprietary Hidden Pivot Method, and it implies that the current weakness is a correction that should be bought, not feared. We’re prepared to do so if there’s a perfect “buy” signal that meets all of our technical criteria. (Click here for a free trial if you want to be alerted in real time). But failing that, we’ll be looking each and every day for painless ways to get short, since evidence is growing that the secular bear market begun in the fall of 2007 has returned with a vengeance following 38 months of Fed-induced buoyancy. Our favored vehicle for playing the downside – one suitable for relative trading novices — is the QQQs. We were looking to buy some July 63 puts if the underlying rallied to a 64.49 target yesterday, but because buyers had exhausted themselves the night before, we never got the chance. There will always be another opportunity, as we know, and we intend to be ready for it.