DJIM #4, 2009

One thing is for sure, time is flying by!   It's just amazing that we're already four weeks into a new trading year.   So far, this new year hasn't offered many surprises, but rather, confirmed many people's suspicions.     Yes, we are referring to the still woeful credit crunch, yet recovering one and bad to worse corporate earnings.   The market just finished absorbing a lot of bad news last week, yet surprised many by it's neutral finish to the week.   We played both sides of the market last week, alerting long HK  at 17.5, ESI  into earnings and short a CAT  from 37's and APOL at new highs.  As we noted at the beginning of the year, we'll be entertaining more short trades during the year as we expect another year of many ups and downs.

At this juncture,   the market stands at around 8k Dow and 830 SPX and we only have to wonder what is going to happen, short term wise.     Over the last few days,  we have developed a thesis, as far as DJIM trading goes that is.   If you go back as far as last March, when our beloved government policy makers started intervening with our free market aggressively (Bear Stearns still ring the bell?), there was one clear trend.   The trend is that EVERY time the government made a huge announcement, whether it's the rescue of financial institutions, or a big stimulus package announcement, or cash injection into certain key company... there was only ONE market reaction.     Yes, market rallies!     Of course, you can always argue that every market rally followed by a major government announcement ended up in a failure, eventually.    However, every rally, regardless the time frame, always presented us with some tradable opportunities on the long side.    The rallies in the past 12 months have varied in taste.    Some lasted a mere a day or two while others lasted a few weeks or more.    In any case,  we feel a rally may be at hand when our new policy making team makes the next (or rather their first) round of announcements.   Simply, this market needs a 'catalyst'!.   Keep in mind come February a $200bln ABS TALF  is also to be launched, even this may provide a boost as its' very significant to auto sales.

Here's our reasonings.    We feel that last week was critical in terms of psychological shift in trading.   For the first couple of days, it felt that market was ready to puke everything below whatever the support we had since last November.    The sentiment was so bad in financial industry that some suggest one or two major financial institutions would fail by the end of last week.    Oh yes, it did feel that bad.    Instead, we held and attention is definitely turning to the hope of a government bailout from our new administration.   Sure, you can argue endlessly on the new stimulus package or any initiatives taken by the government as inadequate or simply non-functioning.    However, we are not here to debate this.    We are simply using the past experience to gauge our own trading strategy.     Also from last week,  MSFT and GE were big tells on how resilient this market is acting.     Yes,  both reports spelled trouble that could affect thousands of companies and our economy as a whole.    Instead,  market took the news rather well.     One should only look at the action of the financial institutions.     We have said a million times before and we'd say it again.   If this market were to make it to new low, the financials would have to be leaders and take the whole market down.    The opposite is also true if we want to rally.     So, the conclusion we get is that this market had a chance to take us down last week,  it failed to do so on some pretty heavy volume.   Inevitably, we could be looking at a rebound coming up.    This may be a short rebound and a failed one, but the trade is buy on weakness and sell into rally at this point in time.    I  In all fairness,  we also have to point out that this is nothing but a short term trading thesis and ~940SPX is all we can expect at best.   A lot can be achieved in 100SPX pts.   What happens a month or even a few weeks from now is anyone's guess,  fortunately we don't have to worry about it now.

Bottom line,  we are trading on the thesis that the next major government announcement will kick start a potential rally.    We'll play on the long side and use weakness to add some selective positions here and there.   We are keeping our total position size rather small (if holding overninght) to avoid any unwanted risk.