Great Trades

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Tuesday, March 17, 2009


Bought back GE, "Identifying Bear Market Bottoms"

We had bought GE in the 6's less than 2 weeks ago, and sold it last week in the 9's. Here in after hours, we bought back GE in the upper 9's after it has consolidated its big gain the last few days.

The pullback in the market yesterday into this morning gave this rally additional energy to move higher. There are still some negative indicators on the market, as well as strong resistance close by for the S&P 500, but GE should hold up well on any pullback, and it may have set its bear market panic bottom around when we orignially bought it. It provides a good hedge against our remaining short positions.

As we said this weekend, "Whether the next pullback results in new lows or just a shallower correction, we plan on covering shorts and getting back long for what we expect to be a strong intermediate-term rally." GE is the first of the longs, in case the market breaks resistance and continues higher before the next pullback.

The reason we wanted to cover shorts on the pullback and get back long for a strong rally is that there are some strong indications that such a rally is either under way or will come after a stronger pullback. This award-winning paper,
Identifying Bear Market Bottoms and New Bull Markets, discusses the fact that major market bottoms are identified by a series of 90% downside days followed by 90% upside days. This is exactly what we've had in recent weeks, and it looks like today we had a 3rd 90% upside day of this rally.

Because of this major bottom signal, we were tempted to cover all shorts and get back long this morning after this first pullback. However, with negative signals still around, strong resistance close by, and the market very extended short term, we chose to cover partially and will stop out of the rest of the shorts on a breakout of resistance, or will cover on the next pullback. Also, there have been a number of both 90% up days and 90% down days in this bear market, so this signal doesn't mean the bear market is over.

Beyond the short term, we believe the signals discussed in this paper can outweigh signals that would normally be negative for the market. However, the market is very extended in the short term, so we still expect another pullback to start fairly soon, and it could be a sharp one, though the break of yesterday's highs means it may start from higher.

Open Positions: 40% short S&P 500, 20% short financials, 10% long GE, speculative traders short financials an additional 40%, short an additional 20% S&P 500, long an additional 5% GE, short gold to hedge.

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