Mystery Trader

Everyone says a new high on the Dow is in the bag. The market goes up every day and surely will continue to go up forever. Media commentators are bullish, bullish, bullish. Wall Street urges us to Buy, Buy, Buy!

As Joe Granville says, what is obvious to the majority is obviously wrong. The market is overbought, and my guess is that a hard correction is due next week.

Month-end seasonals expire on today’s close. I may trade two sides (both long and short) during the day today, but I definitely want to go home short this afternoon.

Q2 GDP growth came in at 2.6%, down from the consensus expectation of 2.9%.
The growth of the economy has turned down.

The market thinks a moderating pace of growth is good—but is it? That depends on how far the downturn goes. And at this point, I don’t think anybody knows.

I think the market OUGHT TO price in this uncertainty. Stocks look overbought to me, and an October surprise to the downside would come as no surprise at all to me.

August durable orders fell 0.5% and orders excluding transportation fell 2.0%. Businesses are cutting back capital investment, and that should ripple throughout the economy. And, of course, housing is in a recession.

Today’s stock market reaction to this sobering news might reveal the actual underlying strength or weakness of this market. If the rally has been running on fumes, as we have been thinking, this news may be enough to turn the trend down. On the other hand, impressive market resilience could imply that the smart money is looking ahead to something unforeseeably great, although I cannot imagine what that might be, but never mind that.

Recession is good for bonds, so bonds’ upside push should be encouraged by the drop in durable orders.

As Dick Diamond (indextraderblog.com) says now, “I think the market is running on fumes now and a sharp 20 point selloff [S&P 500] is right ahead of us. I enjoy trading both sides of the market but for right now my only choices are short or flat.”

I could not agree more. Dick is a trading genius.

Still, keep in mind that shorting is a counter-trend trade and therefore is risky. Besides, we are not always right, you know. Nobody is right more than 60%-80% of the time–max.

So, let’s not lose our heads shorting here. Enter smart stops and be ready to TRADE the market.

The market gets you when you get too opinionated.

Earnings warnings from Boston Scientific and KB Home might help sustain the new downside trend direction.

Therefore, I am holding shorts and selling more stock indexes short on minor price strength.

The economy now looks weaker than generally expected, and that is hurting stocks and helping bonds. I had to cover bond shorts at a loss and would not bet against bonds’ price uptrend at this time.

The Federal Reserve left the fed funds rate unchanged at 5.25%, as generally expected. The accompanying policy directive said moderation in economic growth appears to be continuing, partly reflecting a soft housing market. The market got what it expected. This news was very widely anticipated.

The market does not usually discount the same news twice, both before and after the actual announcement. Therefore, I am selling stock indexes short on price strength now.

of futures and options probably have run their course.
I am looking for a return to choppy, two-way stock price action over the next several days.
The same may apply to other markets as well.
Commodities might be oversold.
Fixed-income markets had a big run and might be running out of steam…
looking to sell short bonds now.

Clear price breakdowns in oil and gold…
Stocks and bonds now taking encouragement from such signs of falling inflation…
I am just going to quick scalp for small gains, both ways, for the rest of this week…
Options expiration makes for artificial fake-out moves, probably in the form of temporary strength this week.
I will be looking for more significant downside reversals next week.

Clear price breakdowns in oil and gold…stocks and bonds also looking vulnerable to price decline…talk of recession…

Does it really make sense that everything should go down at once?

If you answered this question either way, you lose! Trying to make logical sense of market movements does not make money. Just trade the actual trends.

My sense of the trends is that the downside risks loom much larger than any upside rewards for stocks…so I am looking to sell short any bounces.

News this morning that unit labor costs rose at a larger than expected 4.9% rate might be enough to end the recent unconvincing upward price drift on very light volume.

I think that the downside risks loom much larger than any upside rewards…so I am selling short.