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Kass: Market Jumps On Short Squeeze – It Won’t Last

By Guest Author | November 8, 2018

Though we will hear many “after the fact” explanations, I can not (with any confidence or with honesty) explain the magnitude of yesterday’s remarkable market ramp:

Perhaps it is as Albert Camus once said, 

“Stupidity has a knack of getting its way.” 

But, that is probably too glib of me.

Frankly, I just don’t know.

  • Was it market participants’ poor positioning? (It’s hard to explain such a massive ramp on this factor)
  • Was it a post election relief and a view that the gridlock would be beneficial (from a policy standpoint)? (To the contrary, I see, as written recently in “Split Decision,” a period of political chaos)
  • Was it relief that the Mueller investigation will be dulled with the Attorney General’s dismissal? (Not likely as things could now get hotter for the President with the Democrats owning committee leadership.)
  • Was it better than expected EPS reports? (I saw nothing to make me believe this to be was a catalyst)
  • Was it based on a more benign Fed? (No evidence of that either)
  • Was it “seasonality?” (Not enough to matter relative to the sizable gains)
  • Was it a function of machines/algos and ETFs (rebalancing) going wild? (Probably some of this but it is hard to explain the magnitude of the rip) 

Investment vision is always 20/20 when seen through the rear view mirror.” 

So, let’s leave it to the geniuses in the business media to explain to us why the S&P gained more than 50 handles on Wednesday – they seem to have all the answers!

Tactically I covered my trading short rental (for a loss) on the pot stocks and I continued to raise my cash reserves.

After the close, when I returned to my trading desk and digested the gains and assessed reward v. risk, I reestablished a trading long in at $35.04 – which I will likely sell today (win, lose or draw).

I am committed to being authentic in my Diary – if I don’t understand the markets (and its reaction) I write that. Unlike some, I don’t answer questions on every subject (because I don’t have anywhere near all the answers). I don’t B.S. our readers and I call out B.S. when I see it in the business media and elsewhere.

There is so much I don’t understand in the markets, in the (mis)interpretation of global economic growth, policy risks, political uncertainties.

I Am Poised to Move Back to a Large Short Position

As the market broke down late last month I penned a column, “A Contrarian’s Thoughts” (while I unemotionally took on a number of trading long rentals based on the expectation of a possible rally in the S&P Index towards 2800-2850): 

“The pessimism is thick now – in marked contrast to the last six months. Everyone who can read a chart sees the breakdowns.

There are now likely “bad shorts” (read: inexperienced) in the market. Many who rejected the notion of a market top in September now seem very confident in a bearish short term viewpoint.Meanwhile, the CNN Fear & Greed Index is still at extreme fear. 

My contrary view is that we see a rally over the near term – despite the ten handle drop in the S&P Index this morning. I have added to my net long exposure this morning.

And, as I mentioned on Bloomberg “Market Surveillance” this morning, I plan to move back into a net short exposure on a possible rally in the S&P Index towards 2800-2850. As I also mentioned on Bloomberg, shorts are principally trading positions that have to be “hovered over” and actively managed.

That’s my tactical approach and these are my time frames.”

We are now back into the 2800-2850 range and I am preparing (again, unemotionally) to move back to a large net short position.

Here is a partial look at my book which is materially comprised of short term Treasuries (maturities one month to two years): 

  • Longs: (TWTR) , (BOX) (speculative), (DWDP) (HIG) , (C) , (BAC) , (JPM) , (WFC) , (SPY) puts
  • Shorts: (IYR) small

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