Fear Trade in Reverse

  • Posted by
  • on February 1st, 2011

As hard as it may be, imagine the way you felt about the market over the weekend.  Based on the pros I follow on a regular basis, most were relieved the market took a break from its slow crawl upward.  Those markets aren’t fun for anyone but the most steely-nerved or systems-based trend follower.

Most I talked with also thought the bull would remain intact, and couldn’t wait for the “Egypt dip” to set up a great buy sometime Monday or Tuesday.  But seriously, could anyone imagine we’d surge uninterrupted from Sunday night’s opening dip to overtake the highs on the $SPX by Tuesday’s lunch?  No way, no how…don’t lie.

I shared here the 3 scenarios I saw as most likely out of the Egypt event, and the one I deemed least likely has taken the lead.  Now, after an uninterrupted 3% run in $SPX to overtake the highs, career risk is the driving force.  People aren’t chasing the new highs because they feel better about Egypt…they’re buying because they feel worse about being underinvested.

This is where timeframe is key…the response to the news is clearly ultra-bullish, but there’s no way you need to enter a buy order for a big cap right here.  This reeks of a fear-driven move; shorts are rightfully panicking and portfolio managers are being sucked into chasing.  Even from major lows or a break from congestion, it rarely pays to chase a 3% index move…from an uptrend that paused for 1 DAY, the odds are even worse.

Relax and wait for better trade location.  Remember the bid simmering beneath this market, just let your favorites flag a little.  $XOM is great and all, but it just gained the equivalent of 3 years of dividends since Friday.  There are 230 trading days left in 2011, and chances are one of them will be a better day to buy.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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