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Will Markets Miss Another Shot at a Healthy Correction?


Every time they're ready to break down, they rally instead.

My favorite Peanuts cartoon was Charlie Brown and Lucy with the football. I'm sure you all remember them: Lucy convinces Charlie Brown she'll hold the ball while he kicks it. But every time Charlie Brown runs to kick the ball, Lucy pulls it away, leaving Charlie Brown flat on his back , crying out in pain and disillusionment . Well, that's how the bears have felt since March. They've played the part of Charlie Brown while the Fed has played the part of Lucy. And the football? It's been a "normal and healthy correction" in this runaway bear-market rally.

Every time the market looks ready to break down, the football has been quickly pulled away from the bears and the market rallies. Since March, all attempted market corrections have been orderly, controlled, and "managed." Take the July 2009 small head-and-shoulder top as an example. The market completed a bearish technical pattern with a break below the 50- and 200-day moving average (DMA) -- which had bears limbering up, seeing the crash before them. Just as the bears came pounding down the field, ready to kick the hell out of that ball, Lucy pulled the ball away and the market went up -- FAST! (This type of set-up and powerful reversal is commonly called a "bear trap." ) The shorts continued to get hurt in what I call "the mother of all short-squeeze rallies." The reversal up from under the 200 and 50 DMA literally broke the back of the bears. They were left lying on that field, full of pain and disillusionment.

Fast-forward to the last couple of months leading to Fright Night Halloween Selloff. The bulls took the market higher in the worst seasonal month of September and made a cyclical bear market high in the famous crash month of October. It looked like the market would actually escape the dreaded September and October months completely unscathed. Then, in the very last week of October, the market reversed again, breaking below the 50 DMA. Unlike July, the current market is far from its 200 DMA, which leaves room for the bears to get momentum going for their next attempt to kick the ball. But will the Fed pull it away once again? Put another way (in case you're getting tired of Peanuts), IF the bears succeed in pushing the market down, will the Fed push it back up with some new bailout, stimulus package, or market reform?

Bears Seeking Redemption

If the S&P closes below 1018, the bears will feel confident the tables have finally turned. They'll see downward potential of over 100 S&P points to the rising 200 DMA as their redemption. But they'll be patient. The bears have been burned before shorting weakness. They won't let that happen again. There are clear signs of another top, but the Bears know how the invisible hand of the Fed keeps corrections orderly. Plus, hot money waits on the sidelines to enter the market on all corrections. The bears also know the bulls anticipate a strong year-end rally as the stock market enters its two seasonally super-bullish months. The mantra now for nearly everyone, bulls and bears alike, is "buy the weakness and sell the rallies." The "sell rallies" part of the mantra is most important because the bulls have so much confidence in "all the liquidity" sloshing around the globe to keep markets rising.

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No positions in stocks mentioned.
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