Know when to hold ’em and know when to fold ’em.

Free After-Hours Analysis: 

The S&P 500 stumbled into a 2% hole not long after the open and it looked like the previous two days of selling was only just the beginning. The economy shed another three million jobs last week but as bad as that sounds, it wasn’t materially worse than the headlines we’ve been dealing with over the previous two months. If last week’s three million jobs lost didn’t dent the rebound, why was this week’s numbers any more significant? And that’s the conclusion investors came to as prices bottomed in midmorning trade and spent the rest of the day powering higher, finishing more than 3% above those early lows.

Is this week’s selloff already over? It sure appears like it. Rather than look at what the market is doing, I prefer looking at what it is not doing because often that is far more insightful. Far and away the most striking thing the market is not doing is selling off in the face of the most severe economic contraction in our lifetime. Rather than argue with what the market is not doing, we need to be savvy enough to recognize and respect the significance of the market’s defiance.

I’ve been there right alongside the crowd questioning the logic of this unbelievable rebound. It doesn’t make any sense. But that is also the reason we need to fear it. When the market disagrees with us, we are always the one that’s wrong, if for no other reason than the market is far more powerful than we are. If this market wants to trade strong, there are only two options, hop aboard or get the hell out of the way.

That said, even I couldn’t resist the urge to look for cracks in this facade. There is a lot of air underneath is and if this breaks, it could get ugly. I shorted the dreadful close two days ago and was adding to my short position yesterday. But rather than stubbornly stick with that trade this afternoon, I saw it was moving the wrong direction and I had no choice but to bailout. We don’t need to wait until our stops are hit to recognize when a trade is going off the rails. This morning was the perfect setup to extend the selloff. Instead, supply dried up and dip buyers flooded the market. That was my signal to lock-in the short profits I had and even get a little long.

If today’s bounce fizzles, I can always get short again. But if this strength persists, it will put a lot of shorts in a very uncomfortable position. As the saying goes, it is better to be out of the market wishing you were in, than in the market wishing you were out.

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Tags: S&P 500 Nasdaq $SPY $SPX $QQQ $IWM