This market is defying all expectations - which is why expectations should only be a very small part of any trading plan. Expectations, while the darling of Economists everywhere, have a nasty habit of getting traders into trouble.
What I think is going on is that the effects of the first two Quantitative Easings are still being felt. There is a long lead time between the time the Fed pumps money into the system and its effects. I've heard six months to a year quoted as the lead time, but I bet it's even longer than that. If that is true, the effects of the easing from early 2011 is just now being felt. It is as if we had QE3 right now. Next year, well, that is another story, but we'll get there one way or the other. And who knows what effect the shenanigans of the Europeans are having on a continuing and future basis, either. If the ECB legally or illegally, openly or illicitly, pumps money into the system in these days of instant capital flows, some of it will find its way into the US markets. Guaranteed.
Nebulous theory aside, and standard market references also to the Devil, this market is showing no real signs of going down. I don't fight the market, but you don't have to fight anything to protect yourself against the inevitable beating this market is going to take. While the Bulls sit back and congratulate themselves in nauseating fashion while they wait to get wiped out in the coming debacle (1987, 2002, 2008, 2009, August 2011, nah, that kind of thing could NEVER happen again, right?), we have a duty to ourselves to be prudent.
My version of prudent is to play this market on the short side. I short the rips and buy back on the dips. If that means I go a day here and there without trading, that works for me, if I want to be a Dick like so many longs I can go look at my account balance. The one good thing about this rise is that there are constant shallow dips. The one certain thing you can say is that staying short will likely continue to inflict short term and maybe intermediate term pain. Not being in the mood for pain, and constitutionally opposed to getting my account cut in half when I go long and then take my eyes off the screen for five minutes and the S&P is down 30 handles, I am selling the new highs and buying back on the shallow dips on a continuing, quick basis. You can do that all the way up, and insulate yourself against a downside surprise.
The other alternative is to just go short and stay short, which I also think is a smart play, but you will need to wait it out for a while and go do other things. Which might not be such a bad thing, and I may do that at some point, too. Just wait until the financial new reports start mentioning the word "panic" every two minutes and then come back and look at your account. But I am not going to get fooled into selling a dip thinking "This is the big one, Louisey!" and then get my head handed to me on a silver platter.
A look at the chart I posted of the Futures shows my feeling that this rally is not just two months old - it actually is five months old. It is getting long in the tooth by any measure. I am not going to hazard a guess as to the top, but it probably is higher than any of us think. Pull up a monthly chart for the last ten years. From the low of March 2003, the market went up until October 2007. Yes, four and one half years.
I am not interested in the time frame, however. That sustained Bull run - which sure didn't feel like one at the time, but was - went from 750 to 1580. While this run was more ragged, the low of 665 in March 2009 could take us that high a well, no matter how much I doubt it. But the big Bull Run doesn't have to actually end for you to get creamed if you just stay long. A standard 20% pullback would also do the trick.
I don't care how much money Bernanke pumps into the system, or how crafty the Europeans get in bypassing their own laws and forcing naive, gullible or misguided private bond investors to fund their unsustainable social spending. At some point the dip will come that doesn't get bought. And that, my friends, will wipe out so many long traders it will make their heads spin like that girl's in "The Omen."
So, be safe out there, and protect yourself. Talk to older investors, and they will, to a man or woman, tell you that they wished they had kept the money they made on the big Bull runs and not inevitably given a large portion, or all, or more than all back when the party ended. I just talked to one of them today, in fact. When the day comes, you want to keep your original capital and your profits, not see it fly out the window to the greedy bankers and investment houses who were slowly building up their hedges while pretending to cheer the market higher. They always win in the end, that's why they have expensive headquarters and the finest computers and access that money can buy. Always keep in the back of your mind the big shots of 1987 and 1999, who banked tens of millions, and wound up bankrupt. "It isn't fair!," they cry, and the market will never care. There will come a day when the time will be right to set up long across the board, but I don't think this is it.
I lay it on the line. I may be completely wrong about everything. But that is what I'm thinking right now.
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