The Case For Short Squeeze

There was excessive bearishness for the month of October. However, the bears appear to have lost the propaganda war. The bulls have been able to spin everything as good news: bad news becomes reason for another rate cut, while good news is simply good news. As a result, the 401k'ers are not bolting.

The bears need the 401k's to head to the exits to harvest their fruits. Not only that is not happening, but the 401k'ers will be putting in another batch of money into the market every month. The bears will lose their patiences and buy back to cover, which will drive the market even higher.

There's also the smell of fresh money in the air. Chinese investors, who have lately gone crazy in the mainland market, are now allowed to put their money into the global market through QDII. Not only that, the Chinese government has also formed its own investment company, with 200 billion US$ to play with, and perhaps another trillion to follow. The sharks in Wall Street are smelling blood.

Here's how things might work out: the Chinese Government, which seems to have too much money than it knows what to do with, hires some Wall Street firms to 'manage' its money. Wall Street sells buble-level U.S. assets to C.G., then engineer a market crash, then buy the same assets back from C.G. at much lower prices. C.G. ends up with less money, Wall Street ends up with more, and everyone is happy.

As a result, even though our stops have not been triggered, we are closing our short positions until all the Chinese money has its chance to play. The Chinese bull market will probably last until next spring, and the global market may well last at least that long.