Eager Bears Eaten Alive [model portfolio opens]

Tomorrow's option expiration day. Over-eager bears have bought 2.2 million put contracts on QQQQ, representing a short equivalent of 200 million shares worth 10 billion dollars. At least half a billion dollars must have been spent during the last month buying these contracts. By closing bell tomorrow, 95% of these contracts will expired worthless.

Internet rumors said that some trader(s?) have spent 1 billion dollars buying put contracts betting major European indexes will fall by a third to a half by closing time tomorrow. Yet right.

Heed me on this one: don't buy options, neither puts nor calls. At least not when everyone else is buying. I don't care if you have a billion dollars to burn. The guys who dare to sell you those contracts have much deeper pockets than you. And they have Ben Benanke working for them.

Major indexes will fall by a third to a half, or perhaps, to two thirds. But that won't happen in a month's time. It's a process that will take up to 18 months.

And before that can happen, the big guys will need to first finish eating up all the eager bulls, bears and the weaker shorts. They don't want to leave the table until they finish their last meals.

Only then will they awaken the sleeping 401(k) account holders: wake up! sell! The avalanche will then begins. The big guys will set up traps 2/3 of the way down harvesting all the much cheaper shares from the 401kers.

So, we will be patient, anxious, even a little eager, but not overly so. We will take advantage of the Fed-triggered short squeeze to open up a model portfolio before option expiration tomorrow. We'll come back in a month to track their performance.

We'll be shorting the following indexes: Real estate, Nasdaq, S&P500, DJIA, RMV & RUT. Let's say we put $20,000 into each positions at today's closing price as follows:

Short ICF 217 shares at $92.38 each.
Short QQQQ 400 shares at $50.03 each.
Short DIA 145 shares at $137.70 each.
Short SPY 131 shares at $152.28 each.
Short IWS 132 shares at $151.56 each.
Short IWM 248 shares at $80.79 each.

We'll set up 10% sliding soft stops for each position. If stopped out, we'll re-enter at the next high point using the remaining funds allotted for that position. Otherwise, we'll check back in a month.

Elliot wave theory says that the China bubble will top out around Jan 2008 with the Shanghai Index (currently 5446) going to around 8000 points by then. If so, FXI (currently $163) will top out around $235. However, we consider this market too volatile at this point to play on the long side, but instead will wait for a signal to enter on the short side.