by Rick Ackerman
With the Dow Industrials up a whopping 1167 points on Tuesday, we need to remind ourselves that the rally was a fraud, driven almost entirely by bears scrambling to meet margin calls. Indeed, the binge was impelled every inch of the way by steady short-covering. The saps who bought into it are certain to regret it — soon, and in a big way. Mr. Market always makes sure of that. His purpose is to make it extremely difficult for bears to rack up a big score even though the collapse they’ve patiently and painfully awaited for years is finally happening. The flip side of Mr. Market’s cruel plan is to trick bulls into staying fully invested the whole way down. The poor fools!
But we would be foolish ourselves to underestimate the power of short-covering rallies, especially if stocks have actually entered a major bear market. For it is our doubts and skepticism that will fuel the rallies, along with a persistent failure to imagine how far they can go. How do we compensate for this in order to avoid getting trampled in the next buying stampede?