There has been a lot of short selling during the week of October 3rd, when many key support levels were broken to the downside. These bearish traders, who are often hedge fund managers, have to eventually buy back to cover their short position. That can make the market rally even stronger. The short sellers are enduring a lot of pain every time the market rallies. We think this is very good for our long positions. As you can see on a day like Tuesday October 18, 2011, short sellers got excited early in at the opening when the market went down. But by the latter part of the day they got punished badly by some positive news out of Europe. The market is just looking for an excuse to go up because there are no panicked sellers left.

A rally has begun. Most of the flock traders sold their retirement fund holdings in the panic days of early October. They just could not handle going through memories of the dark final days of 2008. Therefore it appears that there aren’t many sellers left. That is a recipe for a rally.

Following only the technical indicators as many managers, traders and market timers do, would have left us in trouble. Looking at moving averages of 50 and 200 as well as support level is just not going to cut it these days. There are other very reliable signals that we take into consideration these days.

One cannot follow the herd and win in these equities and bond markets. The volatility is very high and it will stay high for years to come. Tight stops do not work, and the market will spank the uncommitted trader/investors. Get used to this volatility. It is not going away any time soon. And most investors hate volatility and uncertainty. They would rather stay in cash or Treasuries. They may miss big profits. When they come back into the market it will be time for us to sell.