Pop Quiz: Will This Stock Market Rally Last?
Answer: Probably not. Here's why.
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.
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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 email@example.com.
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