What Selloff?

End of Day Update:

The S&P500 set another 2016 closing high Thursday as it continues to leave the January doldrums further and further in the rearview mirror. Oil broke through $40 for the first time in a while and the world feels a lot better than it did a few weeks ago. But to a contrarian, these good times are just as unnerving as the obscene pessimism we saw in mid-February. I trade against the crowd, not with it and right now this feels like too much of a good thing. It bears repeating that markets move in waves and just like January’s one-way selloff stalled and rebounded after it exhausted supply, this one-way rally will run out of demand any day now.

Wednesday the Fed told us to expect fewer rate-hikes this year than previously indicated. That reassurance was enough to fuel this two-day pop that pushed us through the 200dma and moved us to these 2016 highs. But the thing to remember is a big chunk of this buying came from bears covering their shorts and technical traders buying the breakout. Now that we’ve crossed virtually every technical level that people would use, we no longer have this autopilot buying to keep this move going. Instead we will have to convince thoughtful traders to start putting their money into the market. Given traders’ natural fear of heights, this 200+point run from February’s lows has a lot of nervous people sitting on their hands.

Last October we bounced more than 200-points from the lows in a massive relief rally, but we climaxed and stumbled into a nearly 100-point pullback right around the levels we currently find ourselves. While it is hard to sit out a of rally like this when fear of losses is replaced by fear of being left behind, resist the urge to chase. Risk is a function of height and currently these are the riskiest levels of the year. Even if stocks continue going higher, don’t worry about it too much since the inevitable pullback will at the very least retest 2,000 support, and more likely push us back into the mid-1,900s. This is a far better time to be taking profits than adding new positions, so be patient and wait for a better entry point. The more aggressive among us can look for this rally to climax and short a dip back under the 200dma as we transition from this half-full sentiment back to our half-empty obsession.

A notice for regular readers of this blog, I’m taking my family to Hawaii next week for Spring Break and will not be posting to the free blog while I am on vacation. I will continue following the market and premium subscribers will still receive their daily market analysis.

Jani

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