Closing Short Positions; Intermission Review

On Wednesday we posted that a short term bottom was imminent. By Thursday afternoon and Friday, we think that bottom has been reached.

We are therefore closing the hypothetical short positions we opened on this blog space on December 1st. Using Friday's market closing prices, let's survey our catch:

[Short Positions Open 12/1/2007 Close 1/18/2008]

Stock    Open    Close    Profit
QQQQ     51.31   45.35    13.1%
DIA     134.16  120.57    11.3%
SPY     148.66  132.06    12.6%
EEM     154.4   135.4     14.0%
IWS     143.7   125.53    14.5%
IWM      76.58   67.22    13.9%
GOOG    693.0   600.25    15.5%

If we are adventurous, we may even open small long positions on these same stocks today and hold them for 4-6 weeks to see if a small profit could be made. (But bearing in mind that we are in a bear market, that may not be a smart thing to do for real!)

This week the SPX (S&P500) was on two major support lines: the May 2006 top, which becomes a support on the way down, and the extension line of the Aug 2004, Apr 2005, Oct 2005 and Jun-July 2006 support levels. This dual support structure should be quite strong.

On the option front, even as the January QQQQ price target was dropping $3 over a course of 2.5 weeks (from $50 to $47), the March target was staying above $50 and was not budging at all. We are witnessing 1.5 million put contracts on the Q's for March, representing 150 million shares, when the Q's were 45 last week these contracts were worth half a billion dollars. Yet these contracts are still there -- no one is taking any profits. Apparently, these contracts are not speculative in nature, but are hedges for much larger stakes somewhere. Institutions holding large long positions do not like to sell in a down market, they would be buying at these levels to firm up the support and then sell to individuals when the market is moving back up.

From the peaks of last year, the Dow has dropped 18%, Nasdaq 22.3%, and S&P 19%. That's enough of a drop for the first leg of a bear market. Some say that maybe its not over because there hasn't been a panic day. But a panic day is not a requisite for the first leg -- there may yet be a panic day in next week's bottom building actions and it may even go below last week's low, but that doesn't mean the current support levels will not hold.

We expect the Q's to limp back to the $49 level over the next 6 weeks.