Why this rebound still has room to run

Free After-Hours Analysis: 

After some early flirtations with breakeven, the S&P 500 finished Friday on solid ground, adding 1% to Thursday’s towering gains and the index closed at the highest level since early September.

We finally got some good news on inflation Thursday morning and that sent stocks popping like a cork. As I’ve been writing for a while, inflation has been moderating as this spring’s willy-nilly price hikes have given way to price-sensitive consumers pushing back and hunting for the best deals. Add to this the glut of inventory that built up following the post-pandemic over-ordering and few businesses have the courage to keep raising prices this fall.

As fast as stocks shot up Thursday, it’s tempting to think this surge went too-far too-fast, but that only applies to long and extended runups. Thursday was a single session on the heels of multiple large down days, so we are nowhere near overbought right now and this pop still has room to run. I’m not talking about many hundreds of points, but once we get through 4k, it won’t take long to challenge 4,100.

Sometimes the market needs to convince us we are wrong before it can prove us right, and Wednesday’s post-election selloff definitely did a good job of challenging my conviction. But the art of trading is knowing when to admit defeat and when to get stubborn. And Wednesday was one of those stubborn days.

Now, I’m most definitely not advocating stubbornly holding a tumble under our stops, but there are times when we see the market breakdown in a way we didn’t expect and that tells us to pull the plug long before our stops get hit. But I fully expected Wednesday’s knee-jerk selloff to exhaust itself quickly because this is a Fed driven market that doesn’t care about politics. And Thursday’stowering reversal confirmed the Fed is far more important than who controls Congress.

Even though Wednesday’s dip went a little further than I expected and squeezed me out at my highest stops, I wasn’t worried about the rest of my positions and was willing to continue holding them. If stocks crashed Thursday, I would have admitted defeat and pulled the plug. But lucky for me, stocks went the other direction on Thursday and my conviction was rewarded handsomely.

As I said, there is never an excuse to hold under our stops, but sometimes we have to know when to pull the plug early and when to stand our ground. Wednesday was definitely a stand-our-ground kind of day.

And trust me, as easy as that is to say today, it was anything but easy to do on Wednesday. But that’s where our analysis and trading plan help us stick with what we should be doing.

As for what comes next, keep holding the rebound and lift our stops to the lower 3,900s. 4,100 will be here soon enough.

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