I love analyzing the markets because it is a journey into understanding the human psyche. There is no better illustration of the fickle emotional rollercoaster than the recent market volatility. Over the summer the bulls reached a euphoric state of bliss in the belief that bull markets are perpetual and easy. But then something happened. The U.S. dollar began a significant rise that unraveled the commodity complex and drove a new bear market decline in almost every energy and basic material stock. This psychologically broke the euphoria and ultimately drove the panic selling of the 200 point S&P500 market correction in October.
Sell in May and go away has been a well observed seasonal trend tracked by the Stock Trader’s Almanac since 1950. It makes complete sense why it occurs in regards to lower trading volumes during the summer and increased investment flows during the winter months.
The S&P500 has now rallied 130 points in 15 days and the bulls are frothy like a dog in heat. If the market keeps at this pace, it will be at 1900.00 level by the middle of November, right? That makes sense, doesn’t it? Since the market started at 1400.00 at the start of the year, a rally to 1900.00 would only be 36% higher on the year. That makes perfect sense for the current market conditions, considering that everything in the world is fine (sense the sarcasm).
The resolution of the debt ceiling has provided the emotional catalyst that advanced the markets to record highs over the last 12 trading sessions. Witnessing this price move leaves many traders conflicted in their opinions. There is no denying that we have been sounding the warning bells on numerous occasions over the last few months, yet the bulls are relentlessly advancing the market on the back of traders’ skepticism.
Wednesday we issued our crash alert because all 4 criteria were met for the signal, but the alert came after 14 trading sessions of market selling that saw the market regress 90 points (4%). The selling was even more significant in the Dow that experienced a 1000 point drop over that same time. When selling occurs in such an orderly fashion, the short sellers that are trying to profit from the drop get very comfortable. We wrote: We are in crash alert because all of our criteria have been met but the market is significantly oversold on the short term and it would not be out of line for us to see a relief rally over a day or two. We anticipated the bounce and it ended up being a relatively strong one as we saw 40 points on the upside.