Why smart money was watching Monday’s rally from the sidelines

By Jani Ziedins | End of Day Analysis

Dec 18

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The S&P 500 added a half percent Monday, on the first day of what will be a slow, holiday-affected week.

This will probably be the third slowest week of the year, following only Thanksgiving and next week between Christmas and New Year’s. For that reason, I don’t expect a lot of meaningful buying this week. Big money traders who wanted to buy ahead of year-end already bought. These managers have one foot out of the door and are not doing any serious work this week.

As I wrote during Thanksgiving, these holiday-affected sessions are vulnerable to elevated volatility as the retail traders and computers start doing wonky things without big money’s guiding hand.

At this point, I’m content watching this rally from the outside. Seven out of the last eight sessions ending in the green is a lot. The unfortunate thing for anyone buying these highs is the market has a habit of reverting to the mean. A stretch of down days to get us back to more normal levels wouldn’t surprise me at all.

Stocks move in waves, and bits of up are always followed by bits of down. Monday wasn’t that day. But it will be here soon enough, even if the selling does nothing but consign us to a sideways grind into January.

The bulls won again on Monday, but that doesn’t mean smart money was chasing these overbought levels. In fact, smart traders are sitting on a big pile of profits they collected last week and are getting ready for the next big trade. Maybe that’s shorting the reversion trade later this week. Maybe that’s sitting in cash until something more interesting happens in January. Either way, anyone expecting these big gains to keep rolling in clearly doesn’t understand how markets work.

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About the Author

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.