The Prisoner's Dilemma

 | Sep 14, 2012 | 7:04 AM EDT
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You can't make it back in cash. That's what you saw yesterday after the Fed spoke: a combination of buyers who could not wait any longer for the market to come down and buyers who were simply overwhelmed by the bullishness of the Bernanke statements and went in with gusto.

The latter buyers are very understandable. They liked what they heard, they knew that mortgages were going to be the target so they bought companies levered to housing, everything from Home Depot (HD), which our fund did, to Toll Brothers (TOL) to Bank of America (BAC), which is now the bulls' cause celebre.

But the people who have missed this rally, who need to make it back? They are in a prisoner's dilemma situation as long as no one broke ranks, as long as they adopted a rally that "it isn't even up more than 80 points." But as the market refused to surrender and the buying became more voluminous, they had no choice because yesterday was a true rip-your-face-off rally, one even stronger than the averages seemed, one where the defensives really hurt you by barely budging and one where cash decked you and amounted to a short position vs. the S&P.

I get the prisoners' dilemma. While there's a Spanish bond auction next week that will allow the bears to trot around and try to strut their stuff, we're in conference mode and there's not a lot bad that's in conference time.

If I were a bear I know what I would go for: oils and gold. You can rationalize  Franco-Nevada (FNV) (gold income player) or Occidental (OXY), the most levered to oil of the internationals, or EOG (EOG), the best positioned in the country for oil going higher and you can still stay bearish. The oil, you can rationalize, is a play on Mideast turmoil. Gold is to say "I don't trust this rally, its inflationary."

These are the prisoner's dilemma stocks that could have the most upside here now that oil and gold are breaking out.

But you have to do something if you are behind. Without some exogenous October surprise, you may not have the big, big downturn you need. Perhaps we get some Rosh Hashana futures sell program or blow up that no one thinks coming, but it now has to be of Apple (AAPL) proportions. Otherwise, what I see happening is that every percent decline brings in buyers, not sellers, which is quite a turnabout from where we were before Draghi corralled the Germans and brought them to their senses.

So, look for little rip selling as we had yesterday and almost-programmed-like buying down 0.9% by the sidelined prisoners, who want to cut a deal with the bulls before the market goes too low. They just can't afford to fall behind 25 to 50 basis points on a day like today, which is what happened if you had too much cash (the former) and too many shorts, the latter.

The day when you can judge a rally as bearish, when it is only up 80 points, is the day when it doubles from there.

Different pattern. Treacherous for all but the biggest gunners out there, the Bank of America gunners, and boy are they dangerous.

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