The S&P 500 closed out another outstanding week, this time finishing 12% above last Friday’s close. As is usually the case, the best days (and weeks) occur in the middle of the worst times. As I often write, the market likes symmetry and it is no surprise this historic selloff contains an equally historic rebound.
As incredulous as people were two weeks ago when the index surged 20% and (technically) started the next bull market, thus far the new bull has been sticking. I’m most definitely not critical of the people who were skeptical of this sharp bounce because I was right there with them. Of course as is often the case in the market, the more people that think the same thing, the less likely it is to happen. There are a lot of structural and psychological reasons why this happens, but suffice to say, if an idea is too popular, the market is more likely to do the opposite of what most people expect. And that is exactly what we got this week.
Does this sharp bounce mean the selloff is over? No, of course not. Anyone who saw this morning’s weekly unemployment claims knows we are a long way from solving our economic problems. While social-distancing policies have done a lot to contain new infections, they are doing a number on our economy. So far the government has done a good job of reassuring markets by throwing truckloads of money at the problem, but it is safe to say any return to normalcy is still a long way in the future.
As is often the case, the market tends to overshoot during these crashes and the subsequent bounces. Last month’s crash went too far and it appears like this month’s rebound will end the same way. That said, it is easy to predict what the market will do next because it always does the same thing. The challenge isn’t predicting a near-term pullback, it is predicting when it will happen. And most important to us, getting the timing right is where all the money is made.
At the risk of sounding like a broken record, I’m still skeptical of this rebound and suspect the next pullback is just around the corner. That said, I’m prepared to be wrong again next week. What the market thinks is a lot more important than what I think. If it wants to keep going up, then there is only one way to trade it. That said, when the cracks start showing, be ready to get out of the way and even go short. If a person wants to know how I’m trading this, take a look at yesterday’s post.
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Tags: S&P 500 Nasdaq $SPY $SPX $QQQ $IWM
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.