Tuesday, July 21, 2009
"Look, Martha," said the elderly man sitting across from me on the commuter train. "Yahoo's up another 40 bucks today."
It was late December 1999 – the height of the Internet mania – and even the retired couple riding the train back home from a day of shopping was profiting off the move. At the time, I was short a handful of Internet stocks and I was having a bad day.
"You're nuts to be bearish," said Peter, a fellow trader who was riding the train with me. "It's a different world. The old rules don't apply anymore."
Three days later, Yahoo peaked. Six months later, the Internet bubble popped and billions of dollars of equity were wiped out. The old rules still applied. They were just delayed.
One of the benefits of having lived through the Internet mania and having been on the wrong side of it for a while is the knowledge that markets can stretch farther than you expect. But then, they always come back.
We saw a perfect example of this back in March. Stocks were in freefall. They were oversold on every conceivable technical measurement. Still, they continued lower. But the rubber band was stretched too far, and I argued a snap-back rally was inevitable. I was on the wrong side of that trade for a couple of days, but it eventually paid off – big time.
Today we're looking at the opposite situation. After staring over the edge of the abyss just two weeks ago, stocks have gone straight up. By doing so, they've gone from oversold, where everyone was looking for a breakdown of the "head and shoulders" pattern, to overbought, where everyone is now looking for a new bull market.
Heck, even Goldman Sachs is calling for another 15% rally between now and the end of the year. I don't buy it.
You may remember Goldman calling for $240 oil last year. The investment bank loaded up on oil futures contracts before making that call. Oil then rallied in response to its recommendation. By the end of the week, Goldman was up a few hundred million dollars. Of course, oil never made it to $240 per barrel. And funny thing, Goldman Sachs' earnings didn't suffer from oil's decline.
Goldman Sachs knows markets always revert to the mean. No matter how overbought or oversold stocks get, the rubber band will always snap back.
Right now, stocks are ridiculously overbought and due to pullback. We're probably not headed for Armageddon – as I predicted last week. But a quick drop down to 905 or so on the S&P 500 looks like a pretty good bet.
Goldman likely went into the day yesterday long S&P 500 futures contracts. While I have no way to know for sure, I'd be willing to bet they're short S&P futures today.
Personally, I'm buying put options.
Best regards and good trading,
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South American brewers AmBev and Cervecerias Unidas hit new highs.