"May you live to be 100 and may the last voice you hear be mine."
-Frank Sinatra

Yesterday was the most fun we've had in a while. As the market ramped higher in full percentage point increments, it developed a wonderful rhythm ... one, two, three... one, two three... and all of a sudden we were Dancing With The Shorts...

To understand how to Dance With The Shorts, one should have some experience in short selling. You learn how your partner breathes and moves. You learn where her confidence lies. You try to avoid her fears...

By now, we all know that this daily performance dance bounces to higher levels of volume during bear markets than in bull ones. But does the amateur short seller really understand the complexity behind what's happening underneath her feet? Let's consider the internals of the US market's foundation using a simple 3 factor model: price momentum, volume, and volatility:

1.      Price Momentum - never mind the silly guy in the cheap seats who is still trying to convince you that Dancing With Real Investors requires an exercise in valuation. The US stock market doesn't trade on valuation right now. It trades on price. As soon as price penetrated what we have modeled as an immediate term resistance barrier (706 on the SP500), the market really found its footing, and did what American Idol's Randy Jackson would call "blowing it out of the box!"... price momentum is critical to examine, because there are a lot of one factor model traders out there who chase price... once we shot through the 706 line, we immediately put the 755 line of the SP500 in play.

2.      Volume - on the NYSE yesterday, volume ran +33% higher versus the volume you heard out there on the dance floor on the evening prior (with the SP500 down -57% from her 2007 peak at 676, it got eerily quiet). When volume is decelerating in the face of price declines, and accelerating alongside on the UP moves, the short seller better beware. This is new, and doesn't signal another Great Depression.

3.      Volatility - as price momentum accelerated alongside positive volume, volatility (as measure by the VIX) broke her ankle. Yes, when Dancing With The Shorts, this is bad... if you are short, that is... Intermediate Trend line resistance in the VIX remains at 51.24, while the immediate term Trade support of 46.50 (shorter duration momentum) was penetrated to the downside yesterday, closing out the song with a final number of 44.37, which is -44% lower than the freak-out VIX levels of Oct/Nov 2008.

A lot of short sellers are new to being on the dance floor. Yes, the market having gone straight up from 2003 to 2007 had a stylistic impact. For whatever reason, I was fortunate enough to start my career on the buy side in 2000. Fortunate? Right, not so much if I was a levered long investor (the years 2000, 2001, and 2002 were all down years for the US market)... but very fortunate in having learned how NOT to get squeezed during bear market bounces.

I am a firm believer that one has to make a ton of mistakes in this business, using a live audience and marking oneself to market, before they should ever be so foolish to try to make a global macro "call" on the market every day like I have to... ask Jimmy Cramer how being in the fishbowl is treating him these days now that one of this country's finest entertainers (Jon Stewart) is taking him to task on what exactly it is that Jimmy does out there on the dance floor...

In Stewart's case, we have a credible entertainer who is reasonably transparent and accountable going after another entertainer who has issues with the same. It's sort of like Dancing With The Bears - to really pick them off, you have to have been one...

Back to the global macro playbook, I'm going to stay with the program rather than reiterate buying low beta Consumer Staples (Cramer's best idea was buying Hershey last night), and remind you of the BETA shift dance move that my Partner, Howard Penney, made a call on intraday to our Macro clients yesterday. As the music picks up its pace, and the volume accelerates, what you really should be doing is BETA shifting UP.  In effect, do the opposite of what Cramer The Entertainer recommends - buy higher BETA groups like Energy, Tech, and Basic Materials; short Consumer Staples.

I basically covered ALL of my shorts other than 3 positions by Monday's close. I have NEVER done that in my career. We can chalk it up to my being lucky again, and I am very cool with that. Being lucky these days is a lot better than being depressed.

The shorts that I had on yesterday acted great, on a relative basis to the Dancing that was going on out there with the shorts. I ended up with 5 virtual short positions, and they were as follows: short the US Dollar  (UUP), short Bonds (SHY and LQD), short Coke (KO), and short WMS.

WMS tagged me pretty good, and I deserved that. Unlike Coke and Hershey who miserably underperformed, WMS is high BETA, and charged higher with the ultra high BETA Gaming Sector. Good thing we were long names like WYNN, which more than offset that terrible timing decision I made to short WMS early this week.

No matter how good your investment ideas, everything has a time and a price. Ostensibly, all of the dancers on this floor are intelligent market participants. What will differentiate investors in this live Darwinian dance exercise from here will be the same thing that's always governed free marked-to-market performance. There will be winners, and losers. This is America, afterall... and as our Great American friend Frank Sinatra reminds us "You gotta love livin', baby, 'cause dyin' is a pain in the ass. 

May we all live and trade markets until we are 100!


EWA - iShares Australia-EWA has a nice dividend yield of 7.54% on the trailing 12-months.  With interest rates at 3.25% (further room to stimulate) and a $26.5BN stimulus package in place, plus a commodity based economy with proximity to China's H1 reacceleration, there are a lot of ways to win being long Australia.

USO - Oil Fund- We bought oil on Friday (3/6) with the US dollar breaking down and the S&P500 rallying to the upside. With declining contango in the futures curve and evidence that OPEC cuts are beginning to work, we believe the oil trade may have fundamental legs from this level.

QQQQ - PowerShares NASDAQ 100 - We bought QQQQ on a down day on 3/2 and again on Friday of last week.

SPY - SPDR S&P500- We bought the etf a smidgen early, yet the market indicated close to three standard deviation oversold.

CAF - Morgan Stanley China fund - The Shanghai Stock Exchange is up +17.4% for 2009 to-date. We're long China as a growth story, especially relative to other large economies. We believe the country's domestic appetite for raw materials will continue throughout 2009 as the country re-flates. From the initial stimulus package to cutting taxes, the Chinese have shown leadership and a proactive response to the credit crisis.

GLD - SPDR Gold- We bought gold on a down day. We believe gold will re-find its bullish trend.

TIP - iShares TIPS- The U.S. government will have to continue to sell Treasuries at record levels to fund domestic stimulus programs. The Chinese will continue to be the largest buyer of U.S. Treasuries, albeit at a price.  The implication being that terms will have to be more compelling for foreign funders of U.S. debt, which is why long term rates are trending upwards. This is negative for both Treasuries and corporate bonds.

DVY - Dow Jones Select Dividend -We like DVY's high dividend yield of 5.85%.

VYM - Vanguard High Dividend Yield -VYM yields a healthy 4.31%, and tracks the FTSE/High Dividend Yield Index which is a benchmark of stocks issued by US companies that pay dividends that are higher than average.


LQD -iShares Corporate Bonds- Corporate bonds have had a huge move off their 2008 lows and we expect with the eventual rising of interest rates in the back half of 2009 that bonds will give some of that move back. Moody's estimates US corporate bond default rates to climb to 15.1% in 2009, up from a previous 2009 estimate of 10.4%.

SHY -iShares 1-3 Year Treasury Bonds- On 2/26 we witnessed 2-Year Treasuries climb 10 bps to 1.09%. Anywhere north of +0.97% moves the bonds that trade on those yields into a negative intermediate "Trend." If you pull up a three year chart of 2-Year Treasuries you'll see the massive macro Trend of interest rates starting to move in the opposite direction. We call this chart the "Queen Mary" and its new-found positive slope means that America's cost of capital will start to go up, implying that access to capital will tighten. Yield is inversely correlated to bond price, so the rising yield is bearish for Treasuries.

UUP - U.S. Dollar Index - We believe that the US Dollar is the leading indicator for the US stock market. In the immediate term, what is bad for the US Dollar should be good for the stock market. The Euro is up versus the USD at $1.2691. The USD is down versus the Yen at 98.4950 and up versus the Pound at $1.3742 as of 6am today.