‘Perfect Rally’ Eluded Bulls, Slaughtered Bears

Explosive rallies like the one we saw on Friday are opportunistic, launched to milk the last ounce of buying power from ostensibly positive news – in this case, word that Europe had come up with yet another plan to deal with its financial crisis.  Of course, the very word “milk” implies that there were agents working behind the scenes to stage-manage the rally. This is not exactly correct, although it is close enough to the truth to stand scrutiny. Here’s how it works. Although we all “know” that Europe cannot possibly grow its way out of its mess and that sooner or later the euro currency system will unravel, the mere pretense of doing something about it will always be sufficient to buy more time, at least until the day the system actually does fail. This means that those who have bet on the collapse of the banking system will continue to lose money until the day they are right, but not before. And while that day may seem inevitable to many of us, betting on it – especially with put options whose value “decays” with each passing week — presupposes a gift for timing that few humans possess. Indeed, it’s possible that perfunctory bailouts of no real consequence could keep the markets afloat for yet more months or years if not indefinitely. This prospect should not seem farfetched to anyone who has watched the cycles of, if not ebullience, then at least feigned hopefulness interplay with periods of disappointment and despair. Using the lingo of the chartist, we might say that waves of mass psychology have been “trading in a range.” (…)
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