Staying on the Defensive

We are effectively hedged during this mess, and remain flat while I am sure many peers in the real mutual fund world are being destroyed here the past two weeks.

The lower we go, the more we are setting up for a snap back rally. That is the reality - the problem right now is EVERYONE is looking for it. We have seen how vicious the snap back rallies were in the past - they creamed short positions and most of the money on the long side has been made in those very violent short periods of time. But again - so many people are looking for it to happen I find it "too cute" it happens right at say S&P 740 as every trader in the world now anticipates.

When everyone looks for something in the market, it almost never happens.

When this bounce happens we will LAG... but that is because we are OUTPERFORMING now on the downside. I can live with that since capital protection is job #1. As a personal trader you can be a lot more aggressive and completely flip from being 80% short to 80% long in 3 minutes but I'm managing this mock fund account as if I were running $500 million not $250,000. Approaching it from that perspective, I am not pressing on the short side because there is no way I can liquidate 10-15 positions when this market moves +5% on a CNBC news break. I plan to hold much of the short exposure I have now but liquidate some the lower we go down. But not planning to add much on the long side until a clear reversal is afoot; it will just go into cash. Which means we WILL miss the "turn" that the slappys on TV will clap about and say "I told you so!"

But we'll have our money while most of the "knife catchers" will have their accounts obliterated.

Again, maybe the most obvious of all things happen and the S&P falls to 741 (November 2008 low) and every HAL9000 across Wall Street rushes in and we have a beautiful bottom created blah blah blah. It just seems too perfect to me. Upside on a reversal is to S&P 830s or so (I'm using the 50 day moving average), so you can do the math the farther we move down....

Citigroup (C) and Bank of America (BAC) just are done. Even "safe" Wells Fargo (WFC) is being obliterated. (congrats to those of you who caught a trade on that a few weeks ago from the long side but as I said then - you are playing with fire) General Electric (GE) is now a single digit midget. Las Vegas Sands (LVS) looks done - the list goes on. These are amazing times - and I ask where all the people who talked up buying stocks because its a "new year, new attitude - government will save us" 7 weeks ago are? Oh yeh - they're still there on CNBC talking about bottoms.... (same song and dance for 1.25 years)

So to summarize: sometime here in the next 1-10 sessions I expect an explosive bounce up. I have no idea when; but I believe it won't be when everyone expects it. We'll miss much of the bounce but we won't have 10-15% of performance to make up as anyone heavy on the long side now needs just to break back to even versus when Timmy Geithner opened his mouth a week ago Tuesday.

It's been a while since we had "Sunday night announcements" so we'll see what an increasingly desperate government pulls out of their.... hat. Remember, "mark to market" removal is the big one.