Why this breakout is the real deal.

End of Day Update:

The S&P500 poked its head above 2,200 for the first time in history. This is a level we’ve been flirting with since mid-summer and while it took nearly half a year, we finally did it. Now that we’re here, question is if this rally through the upper end of the trading range is the real deal, or if it will fizzle like every other failed breakout over the last six-months.

The GOP takeover continues to be the fuel propelling this 100-point rebound. While there was pre-election apprehension over what a Trump presidency would look like, so far investors are clearly excited about the prospects of a business friendly administration. This is a significant and unexpected development that has the makings to be the catalyst that drives us out of this trading range.

While this week’s price-action has been constructive, we have to remember this is a holiday shortened week. Big institutions know volume is typically light and they cannot move big blocks of shares, meaning they made most of their important trades last week. Most of the trading going on this week comes from smaller and less meaningful traders. Without big money’s guiding hand, these little guys throw their weight around and can boost volatility, but their limited size means they don’t have the money to drive directional moves. And so while I like this week’s price-action, we won’t know the market’s true intentions until next week.

That said, it was encouraging to see how the market responded Tuesday on an intraday basis. We opened above 2,200 but cynical profit-taking quickly pushed us under this psychologically important level. But rather than trigger a wave of follow-on selling, supply dried up and we rebounded back to the opening highs. That tells us most owners are more inclined to continue holding than take profits. Their patience and conviction is keeping supply tight and propping up prices. We’ve seen a lot of churn during this half-year consolidation with nervous and pessimistic owners being replaced by buyers expecting higher prices. This core group of owners has ignored every excuse to breakdown all year and it was inevitable we would make a run to all-time highs. Now that we’re here, there is little reason to think they will give up now. Smart traders keep doing what is working and right now that is betting on the market.

Jani

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