End of Day Update:
The S&P500 continues to defy the skeptics as it surged to 2,090 by Wednesday’s close. October’s breathtaking rebound leaves us 2% from all-time highs, something unimaginable only a few weeks ago. I was a member of the buy-the-dip camp, but even this recovery caught me by surprise.
Wednesday’s headline event was the Fed’s policy statement that held interest rates at current levels, but left the door wide open for rate hike in December. The market initially sold off on the prospect of near-term tightening, but it quickly found its footing and rallied decisively into the close. Volume registered at the highest levels since the last Fed meeting.
It appears the market is slowing moving back to a more traditional mindset where good news is good and bad news is bad. For several years we went through a period where the market cheered bad news because that meant a continuation of easy money. But we’ve seen the opposite reaction in recent months. September’s selloff followed the Fed’s no-hike decision, while this afternoon’s rally came after strong hints of an imminent rate hike. This suggests stock prices are no longer dependent on the Fed’s generosity. Instead traders are responding more appropriately to September’s global growth concerns and this month’s relief that the situation turned out less bad than initially feared.
While it is nice to find ourselves in the green for the year, we must be cognizant of where we came from. Two-hundred points over a few week period is a stunning move, but everyone knows the market moves in waves. Without a doubt these two-giant leaps forward will be followed by a step-back at some point. Will we run out of buyers at 2,100? Are traders ready to chase the market above all-time highs? Lets not forget that the reasons for August’s plunge are still as real and present as they were two months ago. It won’t take much to stoke those fears again. While I am happy to see the market recover from an emotional and irrational selloff, it feels like this buying frenzy is just as questionable.
Like always, long-term holders can continue holding. Those with cash should resist the temptation to chase after such a huge move. While momentum is clearly higher and will likely challenge 2,100 resistance, we know a step-back is coming. The patient trader will wait for the inevitable vacuum of demand that follows every panicked buying frenzy.
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