It’s always dangerous for a market to rally on a rumor. Yet this afternoon, the markets rallied on speculation that the Federal Reserve will not wait until the end of the month to cut interest rates again. Many market followers, for example, now expect a surprise Fed move coming soon, and this hope was enough to spark mid-afternoon buying interest.

It’s equally as dangerous for a market (or stock, in the case of JP Morgan) to rally on news that wasn’t as bad as Wall Street had expected. You see, shares of JPM are trading higher after posting smaller-than-expected write-downs. “The news was bad, but not as bad as we had expected,” says the average JPM investor. “Let’s go ahead and buy.”

In a market like this, where the bears have been pouncing on every rally, this type of behavior is very dangerous. Sure, the Fed can come out ahead of schedule and announce a surprise rate cut. And if you happen to be lucky enough to buy ahead of this surprise announcement, then congratulations -- you’ve made a nice trade. On your lunch break, you should stop at the gas station and pick up a Powerball ticket as well, because that’s an awfully lucky (and rather unlikely) event that occurred.

What will most likely happen is that anyone who bought this rally amidst the speculation will get taken to the cleaners the next day (if not the next hour). After all, in a market like this, you must think like a bear. In order for the bears to make money, they must short a rally. And sometimes, in order for them to get a rally, they need to sit back and let it happen.

Remember, the bears are a patient group; they’re much more patient than bulls like me. Therefore, they have the unique ability to carefully pick their spots in a weak market like this -- and turn every new upside pop into a selling opportunity.

That is their marching order: Sell any rally.

Once you understand their tactics, it’s easy to profit off it. That’s why Adam and I have been adding new put contracts in WOW. The downside action is clearly the dominant trend right now, and thinking like a bear, we want to add puts on any stock experiencing a momentary pop.

No wonder our latest two put plays have been CAT and MCD.

And no wonder each play is profitable!

Bryan
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