The S&P 500 started Wednesday’s session with nice gains and even poked its head above 4,900 for the first time in history. Unfortunately, the index couldn’t hold those gains and skidded all the way back near breakeven by the close.
As I often write, how we finish is far more important than how we start, and by that measure, Wednesday was an ugly session. Far worse than the benign 0.1% gain suggests.
Headlines didn’t change anyone’s mind. Instead, supply dried up when many investors started realizing just how high prices were getting. Without people willing to throw new money at the market, the rally stalled and prices retreated.
Of course, this was expected, as I wrote earlier in the week:
As for what comes next, I haven’t seen anything that suggests we are breaking out of the recent consolidation. And Monday’s lethargic follow-on buying confirms that muted outlook. I’m not calling for a crash or anything like that, just that we need to keep our expectations in check and take our profits early and often. In markets like this, profits don’t last long.
This rally is being driven by Fear Of Missing Out, and prices are going further than anyone thought possible. But no matter how impressive it looks, gravity always wins in the end.
Now, don’t get me wrong, I’m not calling this a top, and momentum can keep this rally going for weeks and even months. Just ask all of the cynics who have been shorting this rally since the lower 4,000s. But no matter how good this looks, all good things must come to an end.
I have no idea if Wednesday’s intraday reversal is the crack that finally breaks this thing. But it was ominous enough that any nimble trader needs to be paying attention. Anyone overcome by greed and predicting weeks and months of gains is going to end up disappointed. The rest of us are collecting our profits and getting ready for the next trade.
The market is acting really, really well. That’s why I’m getting nervous.
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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.