Stephen Eubanks: Everyone Would Be Right If They Just Had More Time

Choice quotes from our weekly Wednesday afternoon chat with Stephen Eubanks, founder and principal of MrTopStep and Eubiquity Capital:

"When you see the financials--MS up 20%, GS up 14%, and JPM up 10%--all on the EU having that haircut so that no one would default, that's a huge move. It's a great move, but it's also indicative of a huge short squeeze. Last week, we were running at a 4.5% short position in the S&P, and so that has added fuel to the fire." "You've got a lot of guys saying it's a bear market because we dropped 20%, and then you get a huge 20% bear market bounce. We come in on Monday, and everyone is looking for a reason to sell, and you get the MF Global news. At one point, we were down 6% off the 1288 high yesterday." "You can feel it and see it today by how guys have chased performance. There is the fear of being in the market and the fear of missing it. Sometimes missing the market is greater than the loss of capital. You do have a lot of guys chasing this. That could be a recipe for disaster as well. If it's a chase and it's nothing more than guys trying to flip stock to get their performance numbers up, that's a moment in time that is eventually going to evaporate." "Most mutual funds end their year on October 31. You are going to have a lot of guys in the mutual fund index just trying to closet index themselves--if the S&P goes up 1%, they want to be up 1%. If the market goes down 1%, they want to be down 1%." "Hedge funds obviously want to have huge outperformance. Their books close on December 31, so you have the hedge fund guys really trying to deliver alpha, and mutual funds are pretty much running fully invested--whereas hedge funds have most of their money sitting on the sidelines. So, you do have that confluence happening where guys are starting to chase stuff. The momentum crowd is there." "The bonds know well in advance of a problem in the equity market or the equity shares. That was happening all through Bear, all through Lehman, Bank of America, Merrill. So, the bond market knows much more than the stock market does--that's always been a rule. When you start to see that elevation [in credit spreads], that's a shot across the bow to be aware of." "If you look at the S&P chart and you circle the head--anywhere near 1270-1285, it looks like we are in a head-and-shoulders pattern. So that could be it for right now; that could have been the move."

Be sure to listen to the audio for the complete conversation and tune in again next Wednesday afternoon for more discussion with Stephen Eubanks on market movement and sentiment. MrTopStep is a service for investors that provides real-time access to a network of floor traders from the pits of various exchanges, giving insight on order flow, market color, and technical biases. For more, check out www.mrtopstep.com.