Great Trades

Our trading model had anticipated a sharp market pullback last week after multiple extremely low CBOE put/call ratio readings. As expected, the market did get a sharp pullback from our January 28 shift from long to short -- the S&P 500 dropped from 877.86 that day to as low as 812.87 last week.

However, late last week, instead of selling off further on bad economic news, it rallied from Thursday's gap down into Friday's close in anticipation of Tim Geitner's bank rescue plan and the new government stimulus package. Shorts covered ahead of the weekend in case of big government intervention news, pushing the market indices through some key resistance, which triggered stops on shorts (including ours) and brought in more buying.

Below is a chart of the CBOE put/call ratio. There were multiple extremely low readings (below .80) in Late October, late November, and late December:

Each series of low readings was followed by sharp selloffs in the S&P 500 early the following month, 26% from November 4-21, 9% on December 1, and 15% from January 6-21. With recent put/call readings similar to, or even more extreme, than those of late December/early January, we believe there's a strong chance of another sharp selloff in February. The timing of this indicator isn't very precise, but an increasing put/call ratio will provide confirmation of this signal.

While the S&P 500 remains below the January 28 high, our trading model is still anticipating a market pullback very soon, perhaps after the stimulus/Geitner news comes out (a sell the news reaction after the rumor was bought late last week). With news on the government intervention expected early this week, our trading model will likely reshort on Monday, or possibly Tuesday. Look for intraday updates in the next couple of days.

For now, the model will use a stop on short positions at the January 28 high of 877.86, or will not reenter short positions if the S&P 500 breaks that resistance first. There are also some positive market indicators, so there's a chance the next market pullback will come from well above this level.

With the recent whipsaws in the market, influenced by government interventions and rumors of such, we plan to post intraday updates at times, along with stop levels in advance.

Open Positions: None