Updated Battle Plan

Isn't it amusing how fast money flops from sector to sector? Friday it was all in housing; today it's all moved to infrastructure. All based on government announcements; which goes back to one of our 9 conditions for actual investing, rather than whatever this casino has become. Real fundamentals need to begin to matter more than government announcements. What is shocking to me about the infrastructure move is that it was a surprise to anyone - did we not know for weeks (months?) on end that Obama was pushing for stimulus through infrastructure? Now that he said it again this weekend, it now matters? Either the market is not paying attention to the news or we just need a thesis of the day to run up certain segments of the stock market. Anyhow, we are not participating in this run on infrastructure because names I was interested in Friday had settled right up against resistance (which they blew through today) and chasing something up 20% in a day or 40% in a week has proven to be a losing strategy for a long time. Aside from the engineering and contruction names we mention often a lot of material names are also flying on this news. There is such a huge irony because all the same names one could play a year ago based on China strength you can now buy again and just replace "China" with "Obama". Ah yes the "efficient markets". Here is another name which has been "Obama-ing" for 2 weeks; up just under 100% in 2 weeks because of "stimulus".


Now, I'm wondering with Obama's push for alternative energies why these stocks are not rushing upward or maybe oil in the $40s is more important than Obama. Or until Obama explicitly says in an interview "I love solar", then flashes a signature smile or a Palin wink - and then the solar stocks will run up 50% in 2 days or 100% in 4 days. It really has gotten that inane in Ceasers New York City.

As for the market, hey we were up 4% at 3 PM which means as we jump the shark for the 6th straight session (whatever direction we are at 3 PM we go another 2% by 4 PM) we should be up by 6% by 4 PM. (I'm being facetious - it's simply become ridiculous at this point) Again, this is becoming so obvious it's going to eventually snap off a lot of people's limbs when it stops working - one day we will be up by 3% at 3 PM and close down 1% and the jump the shark 3 PM trade will be done with. But apparently not yet.

My game plan is as follows - we went into this week with the lowest short exposure in months and I want to respect the power of Kool Aid. We are making our first real move over the 20 day moving average in 3 months (excluding 1 day in early November), and we now raise troops to attack the 50 day which is S&P 950 (roughly). As we get there I am going to mimic the bank trades I made earlier today - which is to lighten up exposure as we get to a key resistance area and then sit back and watch. In fact I've taken off more of the long financial and commercial real estate late this afternoon - the latter of which makes my skin crawl to be long (however, hard to argue with the P&L benefit). Either we fall back at resistance (S&P 950) and turn back down or we break through and party with Santa Obama. I don't know what we will do, nor do we need to guess. When we get there the price action will tell us - predictions are just for pundits. So we are going to lop off long exposure as we move upward and then be super high in cash awaiting the market to tell us where we go next. Being flexible, we will be more than willing to get the long exposure all back if we blast off past S&P 950.... but within the confines of a primary bear market sell first, and assess second. And more than willing to turn back to the dark side if we begin a breakdown (if hope fades)

If we break through 950 (bullish) we then have a very easy tell at S&P 1000 which were early November highs. That will be the next resistance and we'll do the exact same operations we do at 950 - cut back as we hit it, assess. Rinse, lather, repeat. A break above 1000 would be bullish again.... respecting the downside, I look at S&P 900 which we broke above for the first time in 3 weeks today to act as a support. And then we repeat all the levels we've talked about the past few weeks, S&P 870 and 840 etc etc. The importance is the behavior - will participants "buy on dips" this time - the dips which are sure to come relatively soon after this insistent of a move up? That will be key of a change to character.

Remember, this behavior is much more normal in bear markets then what we've been through the last 3 months - seeing absolutely no rallies is the abnormal act. Not the act of seeing multi week, in fact multi month rallies within the bear market - that's typical. This helps us work off some very oversold conditions. So this is about 2 weeks of rally... nothing special. Just volatile. You can see "reversion to mean" trades everywhere - all the worst hit stuff is now rallying the hardest - Prologis (a REIT) up 40%. Las Vegas Sands (LVS) reliant on US consumers spending again? Up nearly 20%. DryShips (DRYS) - global trade is back on as the global economy revives? Up 50%. MercadoLibre (MELI) - as China rebounds so will everything in South America? - up 36% Etc. Reversion to mean trades everywhere aka shorts run for cover. None of this is leadership or a new group(s) emerging as stock market leaders- that's what we really need.

Remember, this is all sort of a big hoax of a rally - it's all about sentiment and "looking through the darkness" and "knowing the worst is behind us" blah blah blah. We've had these rallies over and over in 2008 and I expect throughout 2009. This is the "2nd half 2009 recovery" rally combined with "government will save us" rally. Even if they are premature we still want to catch some of the upside and not get punished with our short exposure, so we can be cynics but we don't want to be poor cynics. Obama has high intellect and will energize the troops and people will be thankful there at least appears to be some grand plan, as opposed to the current administration which has been exposed as clueless in every facet over the past decade. So just from a "we might have a chance with these guys" sentiment stand point we should be more bullish from there. I still contend the Obama honeymoon will be over as reality settles in by late spring/summer - we should be facing 8%+ unemployment and Obama will say "I told you it will get worse before it gets better". But the market is not about reality - perception is reality. For now "we are saved". Let's position ourselves accordingly - enjoy the gains, while protecting a large part of our portfolio from a return of reality/downside risk. With these crazy ETFs, we can return with half our portfolio what used to take 80% exposure.

At some point here in the next weeks/months the galloping market will offer us some excellent profit opportunities on the short side... the higher the better (more profit when we falter) We can profit both down and up; the trick shall be timing the sentiment shifts. And as you can see everything I talk about is technical because fundamentals mean nothing and government interventions dominate every day. Hence the rules of the game change by the day, so we have nothing left but technical indicators - i.e. what is the herd doing? So we're sticking with that until the government stops dominating the discussion.