This Little Rally Off the Bottom is Like Putting Lipstick on a Pig

by Dan August 31, 2011 9:08 am • Commentary

All appears to be good with the world again…..Asia was generally up in sympathy with the Fed’s outlook, Europe is up soundly up across the board on German Chancellor Merkel’s ability to quell the revolt within her own party that was threatening to thwart the bailout of the Eurozone. And what could be a little effort by beleaguered mutual funds to put a little lipstick on a pig and do a little window dressing on a disastrous month for equities (SPX down about 6% mtd).

As I write at 9am, the S&P500 futures are up about 1%, Dollar is unched vs the Euro, yield on the 10 year practically unchanged, as is crude and Gold (after a monster day yesterday that looks like poised to retake last weeks blow-off highs).

The news clearly seems a bit better, but that will be tested later this morning with readings from Chicago Purchasing Managers at 9:45 and Factory orders at 10am.  All eyes will be on ISM tomorrow as this number for last month caused a good bit of downward volatility. followed by jobs data on Friday.

As for the rest of this week……the same week that I am hoping to take a couple days off (fingers crossed), we could see a continuation of the window dressing as mutual funds could see some inflows for the start of the month after the probably near record outflows they experienced this past month……either way I want to short this market a little before the SPX attempts the 1250 level……I rolled out of some common stock positions into call spreads with some of the gains and now in my most of my longs I am just risking a portion of my recent profits….I think this is a good habit to get into, especially in a market as volatile as this…..

Even with the VIX above 30 I like owning premium here as I believe we are likely to see another retest of the 1121 closing low in the SPX as our fancy European friends get back from their extended holidays…..

I went to let some longs run, the banks stalled yesterday, but some showed a little signs of life late in the day…..if these stocks could get going today we could be off the races…..I want to be careful with BAC here, especially after the monster rally off of the bottom…..the news likely to get worse before it gets better in my opinion and the way the stock is moving around we could see the stock back at $7 just as easily as $9….that is why I did stock replacement and I still own my BAC black swan structure(read here).

So the gist of it is…..if you caught this rally off of the bottom, don’t be afraid to take some profits if you are a trader……If you are investor than it may make some sense to ride it a bit and see if we can get through 1250 as the market looks forward to the potential for additional Fed stimulus at their next meeting Sept 20th…..But I am surely gonna take a shot at shorting this market before the week is out……