Markets continued yesterday’s rally and are trading around the 1460 level. The recent high of 1474 is easily within reach and the market feels like is being drawn back up to that level. But the bigger question remains, will this new high will be a breakout or a double-top?
Employment numbers come out Friday and that will nudge the markets a percent or two one-way or the other. The over the 4-month uptrend, the markets shook off any and all disappointing news. Up until now the employment report has been win/win for the markets, high number shows economic growth, low number means more easy money from the Fed. Will that trend continue tomorrow since we already had the QE-finity pop?
While the market could go either way, the key will be watching how other traders react to the news and the market’s price move. Is everyone excited and relieved? Are they all running around talking about an economic crash? Will they say buy the dip? Or sell the pop?
The contrarian trade is to sell confidence and complacency and buy fear and despair. Because of the pullback last week, I don’t expect an excess of downside potential remains in the markets. The weak holders were shaken out and there is far less selling potential left.
The most bullish outcome will be a pop above 1475 and at the same time everyone is doubtful and suspicious of the rally, claiming the market is overvalued. The pop in price combined with the reluctance to buy means there is a lot of power behind the market and all those reluctant buyers are the fuel to drive prices higher.
The most bearish outcome would be if the report is good, but prices sell0ff and all the pundits are saying this is a great buying opportunity. That means most are invested in the market, yet it can’t hold up and all those owners are potential sellers.
Unless the employment report crashes the market, I expect we’ll set a new 52-week high in the S&P500 index fairly soon. Even if the initial reaction to the employment report is disappointing and the markets selloff, that will represent a buying opportunity as the market regains its footing and resumes its quest for marking that new high.
The guide going forward will be responding to sentiment after the new high. I expect a fair level of cynicism will remain and that will fuel the rally for a bit longer. But if we see all the bears giving up and going long, then we need to take profits and wait for the market to correct.
Jani Ziedins (pronounced Ya-nee) is a full-time investor and writer who has successfully traded stocks and options for more than a decade. He earned a B.S. in Mechanical Engineering from the Colorado School of Mines and an MBA and M.S. Marketing from the University of Colorado Denver. His prior professional experience includes manufacturing engineering at Fortune 500 companies, structural engineering, small business consultant, collegiate instructor, and managing investment real estate. He is now fortunate enough to trade full-time from home, affording him the luxury of spending extra time with his wife and two young children.