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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.
Position in SPY.

Todd Harrison is the founder and Chief Executive Officer of Minyanville. Prior to his current role, Mr. Harrison was President and head trader at a $400 million dollar New York-based hedge fund. Todd welcomes your comments and/or feedback at todd@minyanville.com.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

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