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Thursday, May 14, 2009

Now Short Term Bearish and Here's Why

Introduction: While I used to be an investment advisor, it goes without saying that all investments should be made to fit an individual's needs. Please do not take what I say here as the end all.

I am already on record as being bearish in the long term still for the market. I now feel the market is headed for a 10-15% correction over the next 120-180 days. Here's why.

Back when we were at about 6700 on the Dow, the market turned around starting with news that Citigroup had sent an internal email that said the bank was doing well in the first two months and were on their way to being profitable for the quarter.

To me, this was a peculiar piece of data to get excited about. On any given day, two to three pieces of economic data come out. For instance, today, the new unemployment filings were reveled and PPI numbers came out.

Since March, the market has been going up. That's not to say that all economic data were positive. In fact, they weren't. The market fixated on that data that was positive. Early in the move, I referred to this phenomenom as the market being oversold. This means that stocks were cheap and traders and investors were looking for good news. Since there is so much data, good news is easy to find if you look.

Since, we have seen the Dow go from 6700 to 8400 and S&P and NASDAQ have seen similar moves. Given that, I believe we are ready for a pull back and now the market is overbought. The first sign was the reaction yesterday to the consumer spending numbers for April. They were negative but for the first time in a while, the market reacted negatively. All indices were down at least 2% and that made two horrible days out of the last three.

Given where the market is, I believe that a pull back is set to begin. The market was exhibiting what Alan Greenspan referred to as "irrational exuberance". Every piece of economic data produced the narrative that "the worst was over". Suddenly, the consumer spending data put cold water on that narrative.

This, I believe, has less to do with the numbers yesterday and much more to do with where the market is at. After gains of nearly 30% in less than two months, the market is ready for a pull back.

The economy is still weak. There will be plenty of data to come out over the next weeks and months to support that. The market, I believe, will follow. Expect the Dow to test the low 7000's and the S&P to fall below 800.

I am however bullish on technology. That seems to be a sector that's been doing well.

Now then, how can you take advantage? In the short term, you could either buy S&P put options going six months out, or you can short sell Spiders (trading under the symbol SPDR). Both of these strategies allow you to buy a basket index and they allow to play a bearish position for the relative short term.

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