I was just about to shut down for the week but as I’ve received multiple emails asking for my thoughts on today’s “big” rally, I figured that I’d share them. Basically, not only does today’s rally not surprise me, I expected it. Just to clarify that statement: No, I was not necessarily expecting at 120 Dow point rally today. Nor did I cover my shorts yesterday and go long in anticipation of a rally. What I mean by that statement is that I did NOT expect the market to just keep dropping into oblivion without pause or snap-back (relatively strong & swift) rallies along the way. Just because we have seen some pretty solid, but very early technical signs of a likely trend reversal (again, early signs) along with some reliable sell signals triggering does not mean that one can bet the farm short, shut down the computer and come back in a few months to close those positions and cash out the easy money. Unfortunately it does not work that way. Nor do any of the recent sell signals or bearish technicals mean that the market will or must go much lower before going much higher.
We are still coming off an unusually strong month of domestic (U.S.) stock mutual fund inflows from January and although the rate of those inflows has abated to nearly zero so far in February (a trend which I expected and expect will continue as evidenced by historical seasonal inflows…a chart that I am working on creating to share soon), the fund managers most likely still have a substantial amount of cash on hand to “buy the dips” with. Therefore, until we start to see a trend of outflows, which is likely to begin soon, don’t be surprised to see any big down days answered with couple of strong up days here and there. In fact, although it is not my primary scenario, one last push to marginal new highs in the broad market would not surprise me at all. With that being said, here’s a two year daily period chart of the S&P 500 which shows every significant market peak (which preceded a substantial correction) and the typical snap-back rallies that occurred any where from a few days to a few weeks after prices topped. Remember, swing trading is a marathon, not a sprint, and you must pace yourself accordingly, both from a positioning perspective as well as mentally. Hope this helps and I plan to continue updating the trade ideas over the next day or so. Have a great weekend!