Short Squeezed

Aargh. Last week was awful. Terribly frustrating watching my performance go in the tank. Other than gold (which was up&down) all my positions moved against me. The worst move was the S&P/TSX, which is back where it was in the fall (and is a large position). HXD moved more than the index, indicating there may have been a short squeeze. The index itself has moved more than 12% in the past month, also suggesting a bear market short squeeze. Indices do not usually move like that, especially in bull markets, which tend to be slow upward grinds. I get the strong sense right now that people are jumping back into the market, worried that they may be missing the recovery. Perhaps I need to start introducing some stop losses, but I am not sure. I do not want to be stopped out and then miss the turnaround.

Economic news this weak continues to be weak. NY manufacturing survey showed no growth but the forward-looking parts of the survey were poor. Housing starts and Philly Fed were terrible, and initial unemployment claims ticked back up, with the 4 week moving average staying at 375k. The one bright spot was leading indicators, which actually moved slightly higher. I don't want to discount the leading indicators too much, but one up month does not make a trend. The other data still seem to be showing that we are in the early stages of a recession.

Financial data this week was confusing. The problems in the money markets continued, with LIBOR ticking higher and the TED spread and discount rate spread both remaining elevated. The bond market got whacked, with the 2 year Treasury trading well above 2% (up about 100bps from its low), and the 10 year Treasury up over 20 bps in the week, although it rallied strongly Friday afternoon. The bond market seems to have decided that, with inflation high and sticky to the downside, that the Fed may soon be done with its cuts. This could be bad for equities, if the Fed is prevented from cutting more even if the economy is weak. Currencies are showing that risk aversion has gone away for now, as the EUR/YEN is at almost 164, and CHF is also down. The most confusing trend though is the DJ Transports, which have rallied HUGE from their January lows and breached the October highs, even though oil is at $115, airlines are going under and UPS/Fedex are reporting problems. What gives? Is this a sign that oil prices are not sustainable, that the economy is actually doing OK, or is the market on smack? Definitely a trend to be closely watched.

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