Stocks are having a great week.
From last Thursday’s closing low to yesterday’s intraday high, the S&P 500 gained 130 points. That’s a 5% gain – in just three trading days!! It’s the kind of move that will make just about anyone doubt whether or not we’re really in a bear market.
And, that’s exactly what bear market rallies are supposed to do.
You see, there are two main purposes to a bear market rally…
The first is to punish all the traders who sold short into oversold conditions. And there were plenty of folks who did that.
The CBOE Put/Call ratio hit a decade-high level of 1.8 on Christmas Eve. That means traders were buying 80% more puts than calls. Then, last Thursday, the Put/Call ratio popped as high as 1.31.
Friday’s record-setting rally, and this week’s follow-through, is punishing all the folks who bought puts last Thursday, and all the folks who’ve held short positions since before Christmas. So, I’d say the market has accomplished the first purpose.
The second purpose of a bear market rally is to coax everyone on the sidelines back into the stock market – just in time to smack them over the head with another swipe of the bear claw.
I’m not sure the market has done that yet.
I spoke to a lot of folks about this yesterday. There’s still plenty of skepticism – more than is typical at an intermediate-term top. So, there’s a good chance the S&P will rally up to the 2615 level by the end of the month. Heck, it may get as high as 2650-2700 in the meantime. So, I’m not yet interested in shorting stocks here – at least not in anticipation of a several-week-long decline.
But, I’ve also been watching the financial networks. And the talking heads are significantly more optimistic than they were last week. Just about everyone on air today has been bullish. Everyone is looking back at the Christmas Eve low and calling it THE bottom.
Folks… I don’t know. The Christmas Eve decline to 2330-ish on the S&P was certainly the bottom of the first decline of the bear market. Most technical indicators were so ridiculously oversold at that point that a short-term, or intermediate-term, bottom was in the works.
But, if we are indeed in a bear market – and, I think we are – then that 2330 low is at least going to be re-tested as support. And it’s quite likely that level will fail, and the market will make a lower low.
I could be wrong. Maybe the October to December swoon was only a deep correction in an ongoing bull market. It’s possible. But, I doubt it.
I do not envision a scenario in which the S&P rallies to a new all-time high anytime in 2019. Instead, I think there’s a greater chance we’ll see the index hit something closer to 2000 or below.
So, I’m looking to use this current rally as an opportunity to unload some long positions, and then to establish short positions as the market stretches into overbought territory.
Best regards and good trading,
In today’s mailbag, a Delta Report subscriber thanks Jeff for a trade…
Jeff, thanks. This morning’s Delta Direct suggested a short-term top with a potential for a market reversal. I sold SPY options in the first 30 minutes, put the cash back into the account, and have been watching the SPY drift lower ever since. Nice call. Thank you. By the way, the Mastermind course is terrific.
A couple of subscribers respond to yesterday’s Delta Report Update…
Thanks for practicing patience and therefore teaching us patience. I see more and more that it is more profitable to wait for all factors to align before entering into a trade, and the key skill to wait for the high-probability setup is patience. Once again, thanks! I believe that we are going to be very profitable in 2019.
A quick note to say thanks for not putting out a trade just for the sake of filling space. I really appreciate your integrity.
And another subscriber shares their take on market trends…
I think we are getting some false readings in the charts, mostly due to our trade war with the Chinese markets. Until the 2-year versus 10-year Treasury inverts, the market will chop. Once the trade war is resolved, we will get a blow-off top and that is at least one year away. The market is usually positive in the third year of a presidential term.
Thank you, as always, for your thoughtful insights. We look forward to reading them every day. Keep them coming right here.
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