It looks like the shorts got a little panicked today and rallied the market to the close. What? Don't you mean "bargain" hunters came in and bought the market? NO!
To understand this you must understand what it means to be bearish or a bear. A bear believes the market will go down and furthermore a bear usually positions himself to profit from this decline in the markets.
The current markets have been controlled by the bears and are STILL controlled by the bears. As a bear you tend to short the market. This means you borrow stock to sell. You hope to profit by buying back the stock at a lower price and hence profiting. This is a really hard thing for novice market players to understand, but critical to understand what is going on right now. You sell first, then buy back the stock. You must buy back the stock at some point and if the stock keeps going up your potential losses are infinite. So when you are shorting you must be careful and quick on the buy trigger. You do not short and log off your computer for a year.
My guess is the pace of recent declines had some wanna-be shorts enter late, like Friday and Tuesday. These shorts are in a risky position because we are nearing some major support levels and we have already had such a large sell-off we are very oversold. So my guess is that as today went on and there was no continued sell-off they realized we were not going to crash. Slowly as some of the longer term shorts started taking profits the short term shorts rightfully panicked. Hence the rapid 300 point rise in the last hour or so. Bargain hunters are more apt to buy a little over time and will try not to rally the market. They have big money and are not as agile. There is with no certainty that you can say this is exactly what happened but it is more plausible than saying bargain hunters rushed-in. You have the tape and that is all you have to try to figure out what is going on. The tape points to a short cover rally.
Why is this important? Why is it important to know that it was shorts covering vs. bargain hunters? Well if bargain hunters did come in that would be a more positive sign for sustainability of the gains. The reason is the true bargain hunters have a longer time frame in mind than the bears covering their shorts. The bears are just as likely to enter tomorrow again with more selling. The point being. True bargain hunters portend a stable sustainable bottom, shorts covering portend more declines to follow.
If you look at the fact that shorts face infinite losses, you can easily put yourself in their shoes and see how they could quickly be faced with the need to buy at ALL COST. Buying into a 200+ point rally is more likely to be someone covering a short, than a bargain hunter.
So what you are seeing is fear driven buying vs. fear driven selling. The reason there is a lot of volatility right now is that it is a bear market which by definition is controlled by the bears. Since the bears have very itchy trigger fingers they move the market very fast both ways. It's chasing greed on the way down and fear on the way up.
Don't get caught in false rallies. There are many people short now so i would expect a significant rise over the next week or so, but to me it is a shorting opportunity as this is not yet done. The bear market is just starting.
When it comes to being a bear, i frankly am an expert. I have been mostly bearish for many years and as such when i talk about what the "shorts" are facing I'm really talking about me.
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