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Trick or Treat?

0 | By Shah Gilani

For the past five weeks, it’s been treat after treat for bullish investors.

The “trick” will be seeing if it can last…

How sweet has it been?

The Dow rose 1,459.63 points in five weeks to end Friday at 12,231.11. The Industrials rose 3.6% last week alone. They’re up 14% in that short run, and we’re now up 5.7% on the year. The S&P 500 is also up 14% over the same timeframe, and the Nasdaq has been following dutifully.

The candy being held out has been the hoped-for resolution to all of Europe’s problems. Every little sign of forward movement burned the short tails of greedy bears hoping for a sovereign default and raging contagion.

On top of progress across the pond, earnings here at home have been another treat. Of the more than 300 companies in the S&P 500 that have reported third-quarter numbers, 71% beat analyst expectations.

But, like I said, the trick now will be seeing if it can last.

From a technical perspective, we had every reason to rally.

Sentiment was near record lows. Shorts were near record highs. We’d fallen into bear-market territory by dropping 20% for a brief moment on an intraday basis. The Fed was talking turkey about the economy, and double-dip was on everybody’s pouty lips. When things get that bad and we don’t crash, there’s only one way to go…

Higher.

A few better-than-expected economic data points later, in a few short unexpected weeks, and the whole world is rallying, the sun is shining, and everything has changed.

Just kidding. Wake up. You’re dreaming. It’s Halloween, and you’ve been tricked.

Can the party go on for a while longer?

Yes, sure, for a short while… until the sugar high wears off and our decaying teeth start falling out of our mouths.

The markets are broken. Everything is broken

We are going to get rallies. There are almost always good rallies in long-term secular bear markets, which is where we are at.

About those earnings… They wouldn’t have beaten too many analysts’ expectations if most of them hadn’t lowered their estimates because of the slowing economy and dreaded European contagion fears.

About Europe’s problems being fixed… The chance of the plan to save Europe actually working is exactly zero. Do the math.

All the money, which they say they have, which they don’t have, which will be the starting point of a fund they will leverage, without any way to leverage it that anybody in their right minds would ever invest in (think CDOs in 2008) is only enough to save Greece from defaulting, for about three minutes, and enough to recapitalize all Europe’s teetering banks for about four minutes, and enough to prop up Italy’s bond market, for about six minutes.

Oh, and when the seventh minute starts, they’ll need more money all over again.

In case you missed the good follow through the plan engendered in Europe on Friday, I have some bad news. It’s about Italy, the timer, yes, that six-minute one I was just talking about, well, it started.

Italian 10-year bonds came out on Friday and nobody wanted them.

They had to offer a 6.06% yield to attract anybody. So, who bought them? Oh, that would be the ECB, buyer of bonds of last resort.

Let’s see…

Italy has €1.9 trillion of debt outstanding, €200 billion of which will have to be rolled over in 2012. And their cost of borrowing keeps going higher. Call me crazy, but isn’t that what happened to Greece, which has about one-tenth as much sovereign debt as Italy?

At least things are good here. We’ve fixed out deficits, thanks to that super-committee that’s been so harmonious and transparent. Oh, wait a minute, that was a dream.

Congress is working together and… oh wait, that’s another dream.

Where was I?

Oh yeah, TRICK or TREAT?

Be smart, don’t invest. For the time being, trade.

If after tomorrow the bull takes off his costume and he’s really a bear, don’t be surprised. If there’s a bull under that bull suit, we’ll know by Thanksgiving.

For my money, right now, I’d buy banks and use super tight stop-losses, just in case there’s momentum to this rally.

If I was a longer-term investor and I was itching to buy here, I’d by consumer staples and defensive stocks, including utilities and, of course, big dividend players. And you better bet that I’d have tight stops.

As a trader, with a negative bias, I’m adding to my short euro plays, and looking for the financials to slow their recent rise, flatten out, and turn tail, at which time I will short them, again.

I don’t care if I’m wrong. I’m not investing for the long term now. I’m trading, taking long positions, taking my profits (which I took) and looking to get short again right around here. If I’m wrong, I’ll have very tight stops, get out and reassess my positions.

I’ll leave you with this… out of the last 69 trading sessions, there were only two days where we did NOT have a triple digit intraday move. (Last Friday after Thursday’s giant move was one of them.)

That’s why I’m trading now, and not investing… yet.

Shah

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