Stocks put the hurt on bears as most of last week’s selloff was taken back. But without a convincing shakeout below support, a lot of weak holders are still hanging on and that will probably keep the market range bound. For the time being, the best trade for the time will be getting back into swing trading.
Markets are putting the screws to bears in a short-squeeze as stocks are up strongly without an obvious catalyst. Today we’re witnessing the natural ebb and flow of supply and demand. Tide comes in, tide goes out; stocks go up, stocks go down. People want to assign a reason for every move, but often it is simply a function of the herd moving too far one way. Buyers push the market higher, but eventually the market runs out of new buyers, demand tapers off, and prices nose over. On the other side, sellers push the market lower, but soon everyone who wanted to sell has sold, available supply dries dry up, and prices to rebound.
As I stated in previous posts, I would be more convinced on the sustainability of this rebound if we had a material shakeout under key support levels. Without that, it is likely this bounce is part of a new trading range. It could be an ascending or descending channel, but we’ll probably bounce around until one side becomes overcrowded and the market will breakout to the opposite side. But until then swing trading will be back in vogue. 1425 is the lower boundary and 1475 is the upper boundary. In coming days when the market test either of these levels, we’ll evaluate sentiment in real-time and determine if that is a breakout or a head fake.
The slide over the last two weeks chased out some weak holders and tempted aggressive bears to short, but on a scale of one to ten, this shakeout was a five at best. It was slow and shallow enough that most weak holders could ride it out. These weak holders are always potential sellers and that impending supply will remain a headwind for the market. The best upside potential occurs when all the weak hands flee the market and there are very few sellers remaining. At that point supply dries up and prices takeoff.
No doubt volatility will come from the impending election with bookmakers ever-changing handicapping of the race. Obama was the clear favorite, but recent debates let Romney catch up. My best guess for today’s bullishness is hope that Romney will score another debate win tonight. If the President stumbles in a second debate, that could upend the assumed Obama victory and give Romney a legitimate chance at taking the White House.
Tomorrow’s open will depend entirely on Romney and Obama’s performance tonight. If Obama takes control, expect the market to return to status quo and more softness. We’ll probably see the selloff continue to the election and then a rally into yearend. If Romney impresses again, expect the market to rally into the election and then sell-off into yearend. These will make good swing trades, but for position traders one-step forward, one-back is no different than one-step back and one-forward. But if we are returning to a range bound market, the best trade is buying weakness and selling strength.
Jani Ziedins (pronounced Ya-nee) is a full-time investor and financial analyst that has successfully traded stocks and options for nearly three decades. He has an undergraduate engineering degree from the Colorado School of Mines and two graduate business degrees from the University of Colorado Denver. His prior professional experience includes engineering at Fortune 500 companies, small business consulting, 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 children.