Going out on a limb here...

I am going to go out on a limb here and state that it looks like this rally may be over. But first, I want to quickly comment on the past few weeks. The most important lesson I learned was: trade the market you have, not the market you want. At the time of the Bear Stearns debacle, I stated that it looked like a near-term bottom was close in time (if not in price). But when the market did not collapse, I did not sell. I wanted lower prices, and I did not sell because I did not get them. NEVER be influenced by what you want. Trade the market you have. I learned the same lesson again 2 weeks ago with Agco, which briefly traded in the low 50s due to some margin calls (or so it appeared). Looked like a great opportunity to take a long position, but I wanted a slightly lower price and it got away from me. Now it is trading at $67.

Back to the present: The move over the past few weeks has been fast and furious. Some lingering negativity remains, but there is also a lot of optimism around. Many people are stating that the Bear Stearns debacle marked the bottom, as similar bankruptcies have marked major bottoms in the past. Seems unlikely. There was never a big washout. Sentiment never reached extreme negatives (although it was negative), VIX only briefly touched 36. The consensus now seems to be that there will be a recession but it will be short and shallow. Many people are using the rally to show that technicals are good.

Seems unlikely. Typically, you only get such large rallies in the middle of bear markets. And since when were bear market bottoms called by the consensus only a week after they occurred? True market bottoms are marked by pervasive negativity that lasts even as the market starts to grind upwards. No one believes it will last. Not like now.

On this basis I have increased my equity short once again, diversifying into the EAFE short fund EFU.

MARKET POSITION: SHORT EQUITIES (10 units); LONG GOLD VS. SHORT HOMEBUILDERS (2 units)