The S&P 500 had a good day yesterday, setting another 2016 closing high and putting us back in the green for the year. Quite a reversal of fortune from what most people expected in January.
This is yet another example of why we should be skeptical of what most people know. That’s not to say the crowd is stupid, just that its opinion is already priced in and something else is more likely to happen, either better or worse. This time we were saved by less-bad than feared.
Things didn’t look so great yesterday morning when we opened and the market slipped on Asian weakness and falling oil prices. But Janet Yellen came to the rescue by promising slower than previously forecast rate-hikes. That was enough to send stocks surging and the dollar tumbling. This brings up the other certainty of 2016: euro/dollar parity. So far that’s been a painful ride for all the hedge funds that thought this trade was easy money.
But this only tells us where we are, something everyone already knows. What we really want to know is where we are going next.
Without a doubt this is far better time to be a bull than a bear. We are more than 200-points higher than February’s lows. Anyone who sold defensively and missed this rebound is left wondering what to do next. While I’d love to say we will surge another 200-points between now and June, markets don’t work that way.
The easy money has been made and now the gains will be slower and harder. Given how far we’ve come, this is a far better place to be taking profits than adding new positions. While the temptation to chase is strong, even if we continue higher in the near-term, without a doubt we will retest these levels in coming weeks and months.
Never forget, markets move in waves and we are far closer to the top of this wave than the start of it. There is no need to chase because we will get another shot at these levels in the future and longer-viewed investors should hold off and wait for better prices. Shorter-horizon traders probably want to stick with the near-term momentum. Typically we sell off fairly quickly from overbought levels and now that we’ve been above the 200dma for two-weeks, the next few points are more likely to be higher than lower.
A big portion of the fuel propelling this strength comes from desperate money managers chasing this rebound into quarter’s end. Anyone who reactively sold January’s weakness is in a world of hurt now that the market turned green for the year. Smart money definitely isn’t looking so smart right now. They want to show their investors they didn’t miss the rebound and are buying stocks by the dump truck load.
But all of this changes when the calendar rolls over on Friday. The artificial demand caused by quarterly window-dressing will evaporate and we will see if anyone is left to sustain this march higher.
The real tell will come early next week. Hold up after the artificial window-dressing demand fades, then there is real support under this market. Stumble and all of a sudden weeks of chasing turns into weeks of selling as the market takes a well deserved break.
While I’d love to be able to tell you what will happen, recent price moves are too erratic and unreliable to be predictive. One day’s breakdown turns into the next day’s breakout. Anyone trading this market with a bias is getting chewed up by these head fakes.
But rest assured, the next move is coming and the market will reveal its hand once Q2 gets underway. Trade well and all-time highs are next. Stumble and we won’t catch ourselves until 1,950 support.