The head fake

Posted: May 4th, 2009 | Author: Wayne Weddington | Filed under: Opinion | Tags: market volatility, Strategy, Trading |  Email This Post Make a Comment »

I had excellent open-field instincts when playing football.   The term was to “juke” the defense with the head fake.  I also had speed (4.49 40-yard dash) but it was the open field head fakes that opened the way.

Similarly, in basketball, the quick crossover dribble can leave the opponent’s body tragically conflicted, not knowing in which direction to defend.  The nickname for the crossover dribble, another type of head fake, is the ”ankle breaker” because the defender’s simultaneous movement in opposite directions is likened to breaking his ankles.

The market has rallied magnificently in the last several weeks.  Since its March 9 low of 676.83 the SP500 has surged impressively to 907.24, yielding a 34% return in less than two months.

Is it real or is it a head fake?

While there are glimmers of hope for the economy the stock market has gotten ahead of itself in my opinion.  Structural problems in the economy do not revert so quickly.  Every trader would like to be the one who times the market recovery, thus it becomes a self fulfilling prophecy.  Every slight upward trend gains rapid momentum as no one wants to be the fool who misses the rally — least of all those professional managers hanging on to their clients by a thin thread.  No manager wants to explain why their fund performed less than the market.

Moreover, the potential loss on a short sale position is unlimited:  short sellers must constantly adjust their positions, and they are occasionally forced to close them out, resulting in huge market up-days….  which in turn feeds the notion that a recovery rally is upon us…. and so on, and so on.  The market continues to advance in a pseudo-bullish feedback loop.

I too have had to capitulate occasionally.  I have participated in approximately 25% of the up-trend, attributable mostly to those days where I just gave up, reversed my short equity market positions (globally), closed my eyes and went long.

But do not become complacent.  This rally may be one of the cruelest ankle breakers of all.

– Wayne Weddington

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