The stock market has rallied today on reports from Citigroup that they had two months of profit in January and February. Who couldn't make a profit borrowing at 0% interest and lending out the same money at much higher rates? Nevertheless, this news is the type that provides a glimmer of hope that the worst is over, and could possibly lead the market to a sustained rally.As I have mentioned for the past few days, I have felt that this market is oversold (temporarily). I have felt for the past few days that we were due for a bear market rally. Today's rally feels like a solid one to me. My gut tells me that this one has legs, but I've been wrong many times before. The financial markets have a tendency to humble everyone at one time of another. Even Phantom, in his book Phantom's Gift, acknowledges that he has been humbled more times that he can count. So have I.
I took profits on my longer-term short positions last Friday and I exited the rest of them this morning, and may take a long position tomorrow if this rally extends itself into the next day. However, I also believe that this is one of many "false dawns" in what will be a long and sustained market downturn, so I will maintain very tight stops and be prepared to exit in a hurry if conditions deteriorate. If another negative news shock hits the markets, I will be one of the first to head for the exits.
The smart money will make guarded bets into the markets, but I believe that much of the smart money will use this rally -- if it follows through -- as a way to make some quick profits or to cut their losses, before the next leg down. Unfortunately, many small investors will assume that the worst is over, and will either maintain their long positions or begin to enter the market once again with the long-term funds. This will be a costly mistake!
Grains and other commodities are also rallying, also as expected. I expect an even greater rally in crude oil, as the perception that the worst is behind us will multiply the perception that the demand for oil will increase.
