Initially I had planned to write this summary of the past week’s historic week of trading on Saturday, but I decided to postpone it until Sunday night after the futures opened and had some price action behind them. 

First off, let me just say, that despite the torrential start to the year for the S&P 500, Nasdaq, Russell, and Dow Jones Industrial, and it being the WORST FIRST WEEK EVER in the stock market to begin a year, this is not  2008 or 1929. In fact there are plenty of statistics that show, excluding 2008 most of the time when you have a sell off during the first week of trading, the rest of the year actually does quite well. So regardless of whether the market finishes the market higher or lower, remains to be seen, but what I am confident in stating here is that we are not in the midst of another 2008. 

– The banks are not collapsing. No Bear Sterns or Lehman Brothers

– Consumers are not leveraged up to their eyeballs flipping houses

– There isn’t a huge glut of mortgages ready to default because of subprime loans

You see what I am saying? If this market is truly looking to pullback much further, then I think it will be a climate more like that when the dot-com bubble burst, but to a lesser degree as you had a plethora of stocks then being IPO’d with no chance or possibility of ever making a dime and people were quitting their jobs in the 90’s to become day-traders just like they were in the 2000’s to become real-estate investors. 

But is the market overbought? YES. Is the market prime for a pullback? YES. But even so, the market can work off their overbought nature through time rather than price, and after last year’s slightly negative year, one could say that the former is currently playing out. 

FOR THE WEEK AHEAD you have the August lows nearing. Does the market go down and test it, and if it does, can it hold those levels? If it breaks that would seem to be a place where a lot of investors would be inclined to throw in the towel and start to panic. But if I have to guess, I would say, that regardless of what the market does tomorrow, I would be surprised if the market finished lower again this week. Futures opened down nearly 1% to start the week on /ES but has since managed to recover some of those losses, and the bears have yet to feel the pressure to cover their positions at this point, which was amazing to me that they didn’t do so Friday afternoon ahead of the weekend. But that time for them to cover is nearing and it will create a significant bounce. 

I do want to short this market and believe that opportunity will come soon enough, but when the market has dropped 160 points during a period that is considered the most bullish trading time of the market historically and it does so through multiple, significant gap-downs, the ability to be positioned and stay short to the downside overnight carries a significant amount of risk. Following a dead cat bounce, if the market starts to cave in again, then that will be the time we will want to be shorting the market, and I look forward to that time. We did this in September and it was very effective.

For now though, I think the risk is substantial to shorting the market still, and risk is my #1 concern. The best risk/reward opportunity would seem like a hard 80-100 point bounce in this market, in which profits would need to be booked aggressively, followed by a resumption of the downtrend ultimately.