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Irrationality vs Solvency

Have you heard this?

“The market can stay irrational longer than you can stay solvent.” This idea sure seems to be ringing true for anyone trying to short the market lately. I am also in the “how is the market staying up” camp, but I have made it a general rule of mine to not go short. Therefore while I am watching the indexes, primarily the QQQ continue to reach new highs day after day, I am astonished by the movement but not doing anything about it.

What makes this even crazier is that the market (mainly the SPY and QQQ) has been on such a tear that you would think there is a party going on and there is excitement in stocks all around. The reality, however, is quite different. Breadth in the market has been declining and fewer stocks have been participating in this run.

Because of the declining breadth and the technical indications of the SPY and QQQ being overbought, the idea of shorting the market for an expected pullback seems to be logical. This is the typical configuration that provides a pullback… usually. So the indexes seem particularly irrational, but those trying to go short are likely getting less solvent.

Eventually, things will “make sense” again. I am sure we will get the pullback we are looking for, but it won’t come easy. So be sure, whether you have a long or short trade and the market is fighting you, don’t try to impose your will on it.

Remember, the market can remain irrational longer than you can remain solvent.

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