Round Trip

S&P500 daily at end of day

End of Day Analysis:

Despite its detractors, the rebound continues, this time pushing up to 2,000.

October has been one of the most painful months in years. Obviously the 10% plunge to 1,820 crushed bulls’ spirits, convincing many to sell reactively at steep discounts. But just as shocking was bouncing as quick as we fell. It started as the selloff bears have been predicting for years and they jumped on the short bandwagon with reckless abandon. Unfortunately, rather than take quick profits, most bears were whacked by this historically powerful short-squeeze. They climbed over each other to buy back their shorts and provided the bulk of the lift from 1,875 to 1,975. But as we return to record highs, most bears have already covered for a loss. Without their buying, what keeps pushing us higher? Now the market switched back to humiliating bulls, this time piling on a mountain of regret for anyone who sold the dip. Two-weeks ago they sold defensively, fearing catastrophic losses, now they are buying, fearing being left behind.

The ironic thing is despite the towering losses many traders took this month, October will be a fairly good month, setting up for a very respectable 1% gain. There is a huge swath of investors wishing they were up 1% for the month. But their pain is someone else’s gain.

But enough reflection, where do we go from here? Expect the rate of gains to slow as the market struggles with 2,000 resistance. This consolidation could last days or weeks, but plan for an eventual upside breakout. The recent plunge flushed out almost all the available supply. Anyone that held through a 10% selloff demonstrated an iron stomach and won’t be selling any time soon. That keeps supply tight and makes it easy for the market to continue rallying on low volume into year-end as regretful sellers crawl back into the market.

Jani