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Pop Quiz: Will This Stock Market Rally Last?

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Answer: Probably not. Here's why.

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Editor's Note: Todd posts his vibes in real time each day on our Buzz & Banter.

Question: Today's stock market rally is a function of:

A) China didn't blow up and Shibor is off its most elevated levels.

B) Less-than-stellar stateside economic news has investors dreaming of a tapered-taper.

C) Quarter-end is on tap and fund managers are fighting tooth and nail to defend their portfolios.

D) Traders are conditioned like Pavlov's dogs to buy dips, with or without a trend line.

E) All of the above.

OK -- pencils down. The correct answer, in my view, is E) All of the above, in some way, shape, or form.

Next Question: Will it last?

While my crystal ball is in the shop, I'm making a bet that it won't, and if I'm wrong, I'll be wrong for a defined amount of risk (for particulars of my current position, please click here).

Market breadth (3:1 positive) is the biggest fly in my current downside try, but I'm attempting to keep loose grips on the handlebars and not over-trade; in this market, proactive patience is a virtue.

S&P (INDEXSP:.INX) 1600-right here-is initial resistance (the front of the danger zone) and that will be the battleground as we edge through the afternoon. The bulls want desperately to claim this territory; the bears, of course, want to swat them down.



Around and around we go; where we stop, nobody knows.

I will say this: On May 8, I wrote that the "directional certitude" in the stock market was as high as I've ever seen it (the S&P was trading at 1625 at the time). The tape continued to rally for another 10 sessions-and sixty S&P handles-before dropping 127 handles the following 23 sessions, which brought us to S&P 1560 on the low this past Monday.

127 handles-almost 1,000 points in the Dow (INDEXDJX:.DJI)-is a big number and a reflex rally shouldn't come as a shocker.

I hearken back to September 8, 2011. Anyone who dared whisper a negative word about gold was taken out back and shot. No joke; I consider myself a pretty moderate guy and I got HATE mail; vicious, nasty, searing words for sharing a bubble comparison chart, with gold among the asset classes.

Gold, after that article, dropped 20% this quick, rallied 17%, dropped 15%, rallied 18%, dropped 14% -- went sideways for almost four months -- rallied 14%, and then began the journey lower with a drop of 30%.



My point -- and yes, there is one -- is that markets, be they gold markets, stock markets, or bond markets, tend to pave a path of maximum frustration. That's always been true but these days it's particularly true.

That's why we have to adhere to discipline over conviction as we together find our way; the destination we arrive at will pale in comparison to the path we take to get there.

As always, I hope this finds you well.

R.P.

Twitter: @todd_harrison

Follow Todd and over 30 professional traders as they share their ideas in real-time with a FREE 14 day trial to Buzz & Banter.
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