The last two days have all the markings of a bear market short-covering rally. The sectors that have the most negativity have rallied the most: Retail and Financials. If this were a real transition from a negative selling market to a rally, the sectors that have been leading would continue to lead: Technology and Materials.
So what is happening? People who short stocks are much more skittish than those who go long; they are also more disciplined traders. That means that when a trade starts going against them they get out in a hurry (remember, good traders know that the odds are stacked in their favor and survivors win. I always told my traders, "Survivors win so get out if you don't know why a trade is going against you. Don't be right, be a survivor.") That is why bear markets are full of break neck rallies in lagging sectors. That is exaclty what has been happening the last two days.
I'm using this opportunity to lighten up on some broker stocks, though I'm still holding brokers because I think they are so damn cheap. But I'd rather keep a little money ready to buy them as they are sold into year end by tax loss sellers and insiders.
I want to buy some of these cheap retail stocks but I'm holding off until this short covering rally is over. I'd rather buy from short sellers than buy with them.
Disclosure: In the past month I have bought Nordstrom (JWN – $34.54) and Wal-Mart (WMT – $46.38). I am short Jan 2008, $47.50 Calls on WMT. I am long many brokerage stocks including BSC – $104.54, MS – $56.15, LEH – $64.80 and GS – $234.15. I day traded eTrade (ETFC – $5.97) yesterday from the long side but don't understand or trust their situation enough to actually hold a position overnight.
I used to work as a managing director and am vested in either pension and executive compensation plans of Lehman Brothers and Morgan Stanley.