Wednesday, May 26, 2010

The Case For DOW 4500 WATCH IT Unfold! - Week 4

Gee another down day, it'll not be too much longer before the Bulls DUCK and RUN... 

One thing I have been patiently waiting on is the fall out from this month's slide and impact -- almost certain -- to hedge funds from that near fatal whiplash hit from the "fLash Crash" (Not a Typo).  Keep your eye on the Hedge Fund Implodes in June it'll likely start to heat up as the redemptions start coming in if it hasn't already. 

In my last post John Henry vs The Steam Shovel, hedge funds were likely unwinding a good portion of their trades in mid-March and again in mid-April, whether they were the ones responsible for the May 6h carnage is up for debate.  Either they were the initial cause or they got caught flatfooted, in any case I suspect they started to accelerate their selling since, perhaps in anticipation of massive redemption requests. 

Fortunately for the market the hedgies could sell to the folks fleeing the carnage in Europe and the Euro, although their selling and the institutional selling in May quickly stunted that inflow into the US markets.  

One thing that will be different than last years' breakdown is the manner of selling by hedgies.  Remember all of the current hedge fund agreements with investors were revised post March 2009, and are fundementally different.  Nearly all the hedge funds changed their agreements with investors to require 90 days notice of redemptions and gates of only 25% of the investors money per month/quarter.  How this affect the hedgies and their holdings is not certain, but you can bet the next 30-60-90 days will likely be a great deal of them dumping their portfolios and moving to Cash?.?

I still expecting the DOW to rally into the end on May at least up to the 10,262-363 level, but given today's action, likely hedge fund redemption risk and North Korea's proclivities, we may not get back above 10,088.  Ouch!  

One thing for certain is that the right shoulder has been made confirmed as it broke the February 11th low.  It is inconceivable, but not out of the realm of possibilities that it could retrace this long Black/Red candle, and resume it's upward trend.  



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