Tuesday was another back-and-forth session for the S&P 500. The index exploded above the psychologically significant 4k level when another monthly inflation reading came out better than expected. Unfortunately, that early enthusiasm fizzled and the index retreated back to breakeven just after lunchtime. But just when the cynics thought they finally won a battle, an afternoon rebound reclaimed +0.9% of those early gains.
The cynics thought they finally broke the October rebound when they kicked it back under 4k. For a bear that believed this rebound was nothing more than smoke and mirrors, that retreat under 4k was too good to resist and the shorts piled in hard and fast.
But there is a very good reason all new traders are warned against picking tops. The biggest problem bears have to deal with is the odds are simply not in their favor. This rebound has been charging ahead for over a month and Tuesday set yet another multi-month high. That means anyone betting against this rebound has been losing piles and piles of money for weeks.
Sure, this rebound will stall and retreat like all of the others that came before it, but was Tuesday that day? No, probably not. Think about it this way, if something continues dozens of times but it can only reverse once, what are the odds that today is that single day when it finally reverses? Yeah, not very good.
Of course I would prefer to see the market go up every single day, but everyone knows that’s not realistic. Yet every time the market slips a few points, the crowd can’t resist labeling it a top.
It always takes stocks time to push through prior resistance levels because that’s where people love to call tops. But as I wrote previously, this market wants to challenge 4,100. If it was as weak and fragile as the critics claim, we would have already failed by now. As much as people hate chasing a market that’s gone up, the contrarian trade is betting on the continuation and not joining the chorus rooting against it.
The headlines are improving and the bears are losing the argument. Maybe things will get worse, but for that to happen, we need to see things actually start getting worse. We never trade what could happen, we trade what is happening. And right now this market keeps telling us it wants to go higher.
Protect our profits by moving stops up to the mid-3,900s and keep holding for higher prices. And remember, as soon as we get out, always be ready to get back in if the dip proved to be a false alarm.
This rebound will continue countless times and it will die only once, which side do you want to bet on?
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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.