Sell Euphoria and Buy Panics

And do it in a single day.What a start to the year. Volatility is back with a bang. At the end of the day we are back where we were. Market churned and made no headway.

After few early hits in my speculative career, I have learned the single most important lesson in speculation- Sell euphoria and buy panic. Yesterday was a good example of this rule at work. One must constantly look at the background of a rally and judge the market participants mood.

Look at the euphoric start to year. Participants came to the market early in buy mood. There was desire to be first in the buying line. Some had fear of missing out on a big rally in 2007. The funds were flush with money from retirement accounts and in buying mood. An unusual 4 day holiday had piled up demand for equities.

Also adding fuel to the fire was uniformly bullish consensus from all major market analyst for 2007. Everyone is predicting gains of 5 to 10% for the year. The meme going around is soft landing. Market participants and even stubborn bears have acknowledged that a disaster in housing has been averted. The bears have lost their swagger. Some have thrown in the towel and silently raised their bearish targets up. Some are fighting hard to claim they are no perma bears. That is the backdrop to the market at beginning of year. Wikipedia defines euphoria as state of very intense happiness. When everyone is happy you should be careful. When everyone is convinced that there seems to be little choice but for things to go up, things usually go down.

When I saw the morning action, I was skeptical, even though it looked good, I had serious doubt about sustainability of move based on the sentiment readings. The early strength was soon followed by sell programmes. Even though the programmes are well disguised, you could figure out in few hours after start that there was serious and focused distribution going on in many stocks. All hell broke lose once the FOMC minutes were released. The selling accelerated and a panic set in. Another set of programmes kicked in late in the day. Bought the panic and the day ended where it started.The market problem is not FOMC but euphoria and the overeager dip buyers.

Selling in markets is always well disguised and done silently. This is a 3 rd day of high volume distribution post the Thanksgiving holiday. Even though the major indices were able to recoup some of those losses in the final hour of trading, such a sharp intraday reversal is definitely a negative. The elephants will be able to prop things up temporarily as they put their fresh capital to work. But this smells of a distribution in to euphoria.When emotions run ahead of markets, shakeout happen. The market might make a 10% or more move in 2007 but it is not necessarily going to make that move in first few weeks of January. There will be twists and there will be turns.

As to specific stocks. There are opportunities on both long and short side. The earning season has just started and there were couple of good earnings like BLUD last night. On long side the tape will be dominated by earnings anticipation and post earning reactions. What ever is moving in anticipation will likely be sold, so it is tricky to get in to some plays which are breaking out.
On short side the energy and metal are obvious plays. Energy sector topped out almost 8-9 months ago, so now the slides should start in earnest. On short side best short opportunities are always after a sector has topped out 6 or 1 year ago. Some of the energy stocks showing up on my scan are :
 (Google  Yahoo  Earnings BW  Chart) 
FCX,Freeport Mcmoran C&G B (Google  Yahoo  Earnings BW  Chart) 
MRO,Marathon Oil Group (Google  Yahoo  Earnings BW  Chart) 
OIH,HOLDRS Oil Service ETF (Google  Yahoo  Earnings BW  Chart) 
SU,Suncor Energy (Google  Yahoo  Earnings BW  Chart) 
TEX,Terex Corp (Google  Yahoo  Earnings BW  Chart) 

Bottom line is one must wait for a tradable rally. Current circumstances and sentiments are not conducive to such rally.