Bear market rallies suck...you in

The hallmark of Bear markets is that they usually contain the sharp unexpected rallies that seem to come out of nowhere. The rallies in a Bear market are usually stronger than rallies in a Bull market, the problem is that they just don't last. The reason for the sharp Spikes (more on Spike later) is a function of too many traders pressing in the same direction. In the case of a Bear market where the trend is down, the short interest builds up quickly and ultimately needs to be unwound. When you combine short covering with underinvested Bulls and long-term value players you get a recipe for these sharp Spikes during downtrends.

The real problem for traders is to not get sucked in to these tempting Spikes like we had this morning. Rather it is much more important to identify what the prevailing trend is and decide how to play these fluctuations. Since we have already identified that a downtrend is in place, we would prefer to use these Spikes to sell out of long positions. You may scale into short positions if so inclined. Knowing when to sell strength versus buying strength is of the utmost importance.

We are comfortable in our cautious position and are therefore not looking to do any buying at this point, other than very small select positions in very beaten down names, such as CSCO. For the most part we choose not to short the market at this time either because of our already cautious position. Traders that may be more invested than we are should at least consider adding hedges into strength like we saw this morning.

Steady as she goes and don't be too afraid to miss the upside at this point in time.

Our posts will be infrequent throughout the rest of the day. Sorry for the inconvenience.

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