There Was Fear — But No Capitulation Yet

Yesterday was an amazing day. Everything was going according to plan, and when I went to bed at 2AM (2PM EST) the indices were tanking, on a reversal that I had 100% forecast:

Whatever happens, I'll be expecting a reversal after Bernanke's speech.

But then, when I woke up at 5AM (5PM EST) the markets had jumped an astronomical 7% number from the lows. That was not something I had forecast! In 24 hours, the ES has had 4 different 6-7% moves. Unbelievable. Luckily, and after much hesitations, I didn't put a stop on my long positions opened on Monday just before the close. That saved the day.

What I wrote yesterday is still valid, except that there are additional reasons to worry about the sustainability of such a trivial dead cat bounce:

• Too many people are calling it a capitulation for it to be one. If everybody thinks it's a capitulation, it cannot possibly be one.
• Too many people are still very calm and call the decline orderly.
• Too many asset managers expect a rally and the resumption of the bull market.
• Risk is still on, as shown by the gold buying that is going on. This is not a sign of panic. There's a parabolic rise in gold that reminds me of silver a few months back.
• Too much hope that Ben Bernanke or Politicians or State Sovereign Funds will step in to save the day. This is definitely not a sign of capitulation.
• [New] The move up from the bottom to the top yesterday was about 8% — exactly what happened in 2008 when TARP was first announced. And we all know how it ended.
• [New] The VIX Index dropped 27%, it was its second-biggest percentage drop ever (in its not-so-long history)
• [New] Laszlo Birinyi said the S&P 500 Index will continue its ascent, though possibly not to the level he had predicted. “The bull market is intact".
• Treasury yields have crashed and are at historical lows — 10-Year Yield Hits Record Low

As I said, there's too much hope that the Fed will do something — it's not in the remit of these mad scientists to try and save lousy speculators — or even the President — that's why market commentators complained that Obama's speech sunk the markets — wasn't the purpose of his speech to save the day?

As I said before, hope is not an investment strategy. And belief that central bankers and political will jump in to save you — or even thinking that they could save you if they wanted to — shows a complete lack of understanding of market forces.

I don't know if it's going to be today or tomorrow, but I'm sure that within just a handful of trading days, the gains from yesterday will be erased.