In the space of two trading sessions the S&P 500 has gone from hitting new highs to erasing all the gains for the year. It has been quick and relentless.

So far, although I have avoided the damage, I have not profited from the sell off as I have mistakenly believed this would be more of a rotation than a full blow sell rout.

That theory is looking increasingly wrong.

As we hit the third day of the sell off, I need to question whether I am sticking to that theory for the “right” reasons. As traders we know how difficult it is sometimes to think rationally when the market is not conforming to your expectations.

You are tempted to give up and admit defeat, but there is a part of you that “knows” that this will be the moment you are finally proven right. Yet, quickly giving up and admitting defeat when you are wrong is most often the correct answer. The longer you “fight” the market, the less chance that you are right.

Well, yesterday afternoon, I ignored all this wise advice and went ahead to pick a full on fight with the market.

I am not sure if I am thinking straight, or if I am merely talking my book, but I still think that this sell off is the result of hedge fund liquidation that can quickly turn on a dime.

Don’t get me wrong – I am by no means a long term bull. In fact, you can put me squarely in the bear camp. But as a trader, I think this massive shift in sentiment since Friday’s unemployment number is over done. The viscousness of this sell off is the result of hedge funds and other aggressive portfolio managers/traders’ over exposure to the high flying “beta” stocks. They are in the “just get it off the sheets” mode. And in fact, the more nimble of this group have now convinced themselves that this is the start of the “big one” to the downside.

Whereas I thought they were overly bullish a month ago when they were fawning all over Zuck and the other “gifted and talented camps” companies, I think they are now overly bearish.

So yesterday I decided to try to catch the falling knife of the Nasdaq equity market. I realize that I am dealing with a market where I can no longer lose a finger or two, but I am standing against a tidal wave of hedge fund liquidation. This knife is more like a full on machete, and it is no longer aiming at just my hands. catching from the last bear market in 2008</a> </div>

This is an extremely dangerous market to be trying to knife catch, so I am protecting myself by buying ATM (at the money) calls on the Nasdaq.

The pessimism is quite thick and once again, I am taking the other side of the prevailing wisdom. Nothing seems to be going right for the bulls and the bears are gaining confidence.

However, the market is never that easy, and I suspect that it will find some excuse to make the bears look foolish.

Although I trade this account from a purely discretionary basis, we follow a whole bunch of indicators/systems that help give us clues for market direction. One of my favourite systems, that over the years I have learned to never underestimate, gave its second buy signal this morning. And one of my favourite traders from</a> has a whole host of studies that shows that the odds favour the bulls over the short term.

Finally, April has historically been the strongest of all the months. Have a look at this chart that outlines the returns by month:

It is scary, but I am going to stand in there and take a stab on the long side. Hopefully “turnaround Tuesday” will kick in. Either that, or I am going to need some help getting that knife out of my head.

Where is retail?

Last week-end, Bloomberg columnist Barry Ritholz wrote a quick piece regarding the lack of public exuberance for the stock market:

April 2: Anyone who thinks stock market sentiment is excessive today should speak to the American people. According to a Gallup poll in the first quarter, half of all Americans think putting money into the stock market is a bad idea.

In the 1999–2000 era, 67% of Americans thought putting money into the stock market was a great idea. Only 28% thought it was foolish. Fast-forward to today—more Americans think putting money into the stock market is a bad idea (50%) than think it’s a good idea (46%). We might be tempted to call this irrational nonexuberance in light of the performance of the market over the past five years.

When we think of important market tops, we think of widespread euphoria, absurd valuations, and even the dumbest ideas having endless venture-capital dollars thrown at them. There is little euphoria today for the overall market, as this survey makes clear. Valuations are only mildly elevated relative to history. Profitable companies like King Digital Entertainment, the recently public makers of the videogame Candy Crush, have seen their IPOs tank—and this despite the massive amount of revenue their biggest game brings in. Candy Crush is coming up on a billion dollars in revenue.

That’s the sort of metric the sock puppet from 1999 could only dream about.

Barry makes some pretty good points, but I think he is probably not aware that a couple of years ago, the sock puppet got in on the WhatsApp first round of funding through a connection with Sequoia, and since Zuck’s $19 billion purchase of the company, the sock puppet has been living life pretty hard and fast. puppet in a typical night of debachery</a> </div>

And as for Barry’s point that this market is dramatically different from the stock mania of 1999, I think he is right, but he is missing the real point.

In 1999 the average Joe had some money to invest. Today after Wall Street has bled him dry with the DotCon bubble and then the more insidious Real Estate bubble, the consumer has no extra money to invest (gamble).

So when Barry says that there is no public exuberance during this cycle, he is 100% completely correct. However, unless you think that the consumer is miraculously going to stumble on some massive inheritance from a rich uncle, there will not be any change in the public’s attitude towards stocks.

The public has been burned too many times and is not returning.

Instead what we have is a market filled with thousands of hedge funds all standing around in a circle shooting at each other. The hedge funds are the new “dumb money.” Their over exuberance is what you should worry about, not the public’s.