It appears that I am not alone. According to the Option Strategist newsletter (published by Lawrence McMillan’s at www.optionstrategist.com), as the market continues to rally, look for a shift in sentiment, and expect to be “bombarded with optimism.”

The inference here is that bulls have found momentum. So much so, that we could see the Dow as high as 10,000, through the January 20th Presidential inauguration. Perhaps even beyond that, as optimism escalates around Obamas’ trillion dollar stimulus package.

The problem is that sustainable recoveries require more than blind optimism. McMillan cites the headlines one day after the October 24th, 1929 stock market crash, that read: “Wall Street optimistic; brokers call break ‘technical;’ selling is overdone; dividend-paying stocks are worth more…” It all sounds so familiar.

How many times have you seen, or read, analysts talking about how the worst is over for the stock market. Believing that stocks have already discounted a serious recession, and by all accounts, are worth more. Which they probably are… longer term!

The problem is the intermediate term. Momentum will shift as the market comes to grips with the enormity of the deficit. And a recognition, that spending alone, will not cure the problem.

Somehow along the way, there will have to be a paradigm shift. Just as the internet provided during the low points of the 1988 to 1992 real estate crisis / recession. The internet represented, among other things, a paradigm shift in productivity. Within a very short period, technological change made America competitive again.

The optimist in me believes that something will cause a new paradigm shift, which will support a sustainable economic turnaround. The problem is that I have no idea what that will be, and I don’t know when we will see it.

So what do we have to contend with? A short term pre-inauguration rally, an intermediate retest of the lows and a longer term bullish story.

So as not to fine tune the timing of these maneuvers, consider holding a healthy cash position post-inauguration, and look at buying puts to hedge your stock positions. The put buying makes particular sense if volatility continues to contract in the face of this new found “normalcy.”

If you takeaway anything from this discussion, it is to recognize the importance of hedging your bets. Now more than ever!