Short rallies

• Posted by vinaydh
• on February 1st, 2010

This is not the market to be in love with the long side or catch falling knives. The leading stocks have started falling apart. GOOG has been weak for weeks now. AAPL, AMZN too have started sliding in right earnest. I think it’s way too early to talk of a bottom in the market.

I am amused that some of the perma-bears are preaching that this market is oversold and due for a bounce. Yeah these are the same folks who were shorting this market at every step of the way. There reasoning at that time was that the market was overbought and that there was no rhyme and reason for the market to go up. I think overbought and oversold are the most misused indicators. These indicators work in a sideways market but are totally useless in a strongly trending market.

At any point of time the majority of market participants fall into two categories, the ones who are taking pain and the ones who are being frustrated by the market. Those who are taking pain are the ones who are wrong about the market direction. Those who are being frustrated are the ones who are right about the market but are over thinking and trying to get cute with the market. They will try to catch every little move in the market and in the process miss the meat of the movement. Up until now bulls were being frustrated and bears were taking pain. Now it’s the turn of bulls to take the pain and bears to get frustrated. I would rather be wrong and take the pain than be right and get frustrated by the market.

In short, keep it simple. If you think that the market is going down then short every rally until market dictates otherwise. There is no point in playing the market if one doesn’t have the conviction to take a stand.

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