Back to a Large Short Exposure

Well after our Santa Clause rally (seems so long ago?), once again I am approaching a 20% Ultrashort exposure (19.1%) after buys yesterday and today. Per my own "rules", since this is not a hedge fund but a long focused mutual fund, I try to stay in the spirit and stay within a band of 0-20% on the short exposure, so this is about as far as I go on the 'dark side'.

We have broken S&P 1490 now and don't appear too interested in breaking back above it (but I suppose anything could change in a thinly traded market). Even if we did, we have the 'ceiling' above that. So we appear to be in the band of 1490 to 1440 now. As (or if) we move back to 1440, I expect some fight to be put up there; once again. At some point these repeated retests will fail and we will move down to the next area.

In the big picture we have made what is technically known as a double bottom (definition here) on the major indexes (August and November lows). Generally you get a nice bounce out of a double bottom (which we did). Generally, triple bottoms fail in spectacular fashion. So in S&P 500 world this means the next time we rest those lows around 1400-1405, the inclination is we will have a very good chance to break through... and fall to the basement.

Coinciding with earnings season in January, which will be full of confessions (I believe), this is my working thesis. Again, note the words "generally" I use. Nothing works every time. Nothing is fool proof. But in a mid term view (out past a few days), this scenario has the potential to unfold. But even if it did work out this way, the potential for surprise counter rallies can happen at any moment in a downtrend. And S&P 1440 which every one ("the invisible hand") knows is key, will be defended strongly as well. So neither bulls nor bears can rest too easy. :) But I plan to hold these Ultrashorts far tighter to the vest in the coming time frame as I expect a lot of land mines in earnings season about 3 weeks from now.

I expect January 2008 to be a very interesting month!