Delusional Rally Begs to Be Shorted

While Fitch’s was prudently downgrading 18 Spanish banks on Tuesday, U.S. stocks were thundering higher, recouping about two-thirds of Monday’s sharp losses. Wall Street’s irrational exuberance aside, news sources around the world seem to be catching on to the fact that rising share prices do not necessarily portend a solution to Europe’s deepening financial crisis. Our favorite headline of the day came from the London Globe and Daily Mail, atop a column written by one Michael Barad: Uh oh, Italy swears it doesn’t need a bailout. Nothing like a little humor and a dab of cynicism to put things in proper perspective. Elsewhere in the news, even the usually “Ray-rah, economy!” front page of the Wall Street Journal seemed to have noticed that swelling yields for Spanish debt seem to call for an even bolder solution. Rates on the 10-year were at 6.72% Tuesday, up a steep 6.52% from the day before. This is a euro-era record for Spanish paper, and it makes clear that investors are not willing to suspend their skepticism that a mere $125 billion loan can somehow tide things over for more than a day or two, if that long.

In fact, this token sum has bought just a fleeting blip in share prices around the world – a blip powered almost entirely by short-covering bears, not by investors who actually believe Europe is getting a grip on its problems. Granted, that doesn’t explain Tuesday’s 163-point rally in the Dow Industrials two days after-the-fact. But even if the buying continues for another day or two, pushing the broad averages marginally higher, we’ll be looking to get short every good chance we get. Mainly, that will entail buying put options on the QQQs, a proxy for Nasdaq shares; or on SPY, an equity-based vehicle that tracks the S&P 500. It’s always going to be tricky business jumping in the way of rallies like this one, but our goal in any case will be to minimize risk by using the Hidden Pivot Method to identify potentially tradable swing highs. We’ll make no claims of success herein, but if you want to learn more about our proprietary trading system from hundreds of subscribers who use it, click here for a free seven-day trial to Rick’s Picks. It will give you access not only to a 24/7 chat room that draws veteran stock and commodity traders from around the world, but also to our detailed trading recommendations, real-time updates and impromptu online webinars that seek to ferret out choice trading opportunities during market hours.