Yesterday, I e-mailed a friend of mine who is also a trader and told him that I thought wherever the S&P 500 stock index futures were with 30 minutes to go in the trading day would point to where they would go in the last half hour. In the fifteen or so minutes leading up to my 1:30 PM Mountain Time deadline, the S&P 500 futures rallied about 14 points, more than 1%, to get to even or up a few ticks on the day.
From there, the scenario played precisely into what I told my listeners on Backbone Radio on Sunday night: that the market was in a weak position overall but that sentiment was so negative that we were due for a massive “rip your head off” short-squeeze rally some day soon.
And boy did we get it on Tuesday: From about 1:15 PM Mountain Time until the market close, the S&P rallied an astonishing 42 points, with the Dow Jones Industrial Average rallying more than 350 points in that same time frame.
It would not surprise me to see a modest continuation of the rally on Wednesday morning, depending on news out of Europe and the ADP private payrolls number. But I don’t think the market is entirely out of the woods, and another substantial rally will be something I will sell into (selling out of the money calls, to be precise.)
The market has indeed priced in a LOT of bad news, and I don’t think the market will retest the 2008 lows. But it’s not impossible, if governments around the world make some wrong decisions. While I think the market is already pricing in much of what can go wrong, I think the market’s upside is limited (to perhaps 10%-15% higher than here) until it becomes clear to investors that Barack Obama is a one-term president. And that might not be clear until the votes are counted next November.
This is definitely a “traders market", with a friend of mine noting today that five stocks on his screen had 20% ranges today, and that Morgan Stanley was one of them. His comment: “This is BS.”
Indeed it is BS, but it is what it is, and as a trader my job is to take what the market is giving me and try to find a way to earn a few bucks. It doesn’t matter what we wish the market were doing.
My advice to investors out there is to be careful out there, and please don’t buy long-dated Treasuries. It’s absolutely insane to loan money at 1.9% for ten years or 2.9% for thirty years, no matter how little inflation you expect in the next year or two.
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