Thursday, April 12, 2012

Going after the shorts

The name of the game for today will probably be to go after the shorts, all the people who have placed bets that the market decline will continue, hoping to hit their "stops" (stop loss orders on their short positions) and forcing them to buy to cover those stop losses. Meanwhile, traders will hope to gain from the pop driven by that mini "short squeeze." None of this is an indication of the intermediate market trend, just a short-term trading tactic.
 
Some of these short positions are simply an outright bet on market direction while others are legitimate hedges to protect long positions from downside losses, and a fair number are probably somewhere in the middle, a legitimate hedge plus a little more to "juice" returns. In some cases, stock holders are willing to tolerate market volatility in the near term without any hedge, but can't resist the lure of extra "juice" from short positions on the side. Especially the hedge funds. The actual distribution between these various "strategies" (tactics) is of course unknown and unknowable given the way the various stock markets are currently
constructed.
 
Some of the buying at this stage will be by "dip buyers" who will see a second day of "recovery" as an indication that it is "safe" to increase their long stock holdings. Flip a coin as to whether they are right.
 
In any case, expect more volatility, with quite a mix of days of euphoria and despair. Meanwhile, true investors can sleep well at night simply with a "stay the course" strategy.

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