The S&P 500 closed above the 2754 level yesterday. By any conventional measures, stocks should continue higher. The S&P should run towards the 2800 level.
But these are unconventional times. Computer programs rule the day. Traditional methods of short-term analysis take a back seat.
By far, I think the best trading philosophy of late has been to fade the prevailing opinion of the talking heads on CNBC. I don’t mean any disrespect here. My own opinion of the market has waffled as much as anyone else’s.
But I told subscribers last week that I was uncomfortable with so many market pundits holding the same opinion I had – that the market would retest its closing low. After Monday’s action – which has recovered more than 50% from the 2581 closing low – the CNBC talking heads have become outright bullish again.
One guest after another commented on how unlikely it is the market will now head back down for a retest. I haven’t yet heard anybody offer a dissenting opinion.
Of course… that increases my belief that we’ll retest the lows sometime in the near future – even though, by any measure of technical analysis, the stock market looks headed back towards the old highs.
It is hard to justify a short position here – other than as a way of hedging against some long positions.
If you say, “that’s the same thing as simply being in cash,” I won’t argue with you. And I won’t argue against holding a large percentage of cash in this environment.
The stock market is not behaving in a rational manner right here. Fundamentals don’t matter – AMZN and NFLX, two of the most ridiculously valued stocks of all time, are leading the way higher. And technical analysis is not conforming to its traditional measures either.
Personally… I’m back to swimming in the same pond I dove into in January… I don’t believe this rally. It feels artificial and designed to suck in money from off of the sidelines. And it’s likely to end badly.
Of course, in January I was on the wrong side for a few weeks.
Today feels the same as it did in late January. I can’t argue in favor of short positions because the momentum is clearly bullish. But the momentum also feels artificial.
The best similar position I can point to is that of bitcoin. Bitcoin peaked near $20,000 per coin in mid-December. It was a parabolic move higher, one that sucked many investors in from off of the sidelines. And anyone who dared to question the validity of the move was scolded as a nutcase.
Then, bitcoin lost 50% of its value almost overnight. It erased most of December’s parabolic move. And, even though Bitcoin was still trading 200% higher than where it was six months earlier, the bears claimed victory.
Then, bitcoin rallied back up to $16,000. It silenced the bears and it re-energized the bulls.
That’s when it suffered a more significant decline. Bitcoin dipped below $7,000 in early February. It reached oversold conditions. And it set the stage for a more sustainable bounce off of the lows.
Today, bitcoin trades for about $10,000. If you bought on the initial rebound from the parabolic move then you’re likely still way down on the trade. But, if you bought into the oversold conditions that followed the second decline, then you’re sitting on a nice profit.
That’s the pattern I expect to play out with the S&P 500.
The index reached a parabolic top in January. I was early identifying it. Nobody on CNBC was talking about it. And, many subscribers were plenty ticked-off with me for not being aggressively long stocks as the market pressed higher in January.
They were less ticked-off in early February.
Now, though, we’re in that same situation. Stocks are pressing higher in an unconventional move. Everybody on CNBC is talking about a “V” recovery where they expect stocks to rally to new all-time highs. The selloff from a parabolic top was an anomaly.
This looks a lot like the bitcoin rally from $10,000 to $16,000 in early January. The bears have been silenced. The bulls are re-energized.
I’m not looking to add short exposure here. The momentum is too strong to justify it. But I’m sure as heck not going to tell you to buy stocks into this setup.
The computers are running the show. Investor sentiment is now wildly bullish. And nobody is looking at the risk.
This is exactly the same situation we had in late January.
The S&P can certainly press higher from here. 2800 looks like a reasonable target from this level. But there’s so much more risk than seems evident from current conditions. I think the higher-odds bet is on the downside.
Most folks should steer clear from any new positions right here. Aggressive traders should look to short into overbought conditions as the S&P 500 approaches 2800.
Best regards and good trading,
P.S. Each week in the Delta Report, I send trades to my subscribers based on a simple principle: The reward must outweigh the risk. That way, no matter what’s going on in the market each week, my readers stand to profit.
And right now, conditions are lining up to produce some of the most exciting trade setups I’ve seen in my career.
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Today, kind words from Market Minute fans…
Hi Jeff! I’m a technical trader as are you. We often have similar opinions often for somewhat different reasons. Trading is a very personal thing.
I really enjoy receiving your Market Minute and take the time to read it. I was wondering why, in your opinion, it is so popular for folks to be making those long videos to make some point. Some, like me, rarely want to spend the time watching them. For me, I seldom take the time to do what I’m doing at this moment.
Thanks again for your insight.
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