I mentioned yesterday that although I expected upside I did not believe the market was ready to blast off to new highs just yet. The nature of today's advance i.e. an emotional gap up and run suggests this be the case. If anyone has been reading this blog from when I first started it, I have stressed a few times before that the way the market moves up or down is just as important as the closing price of the market itself.
Sustainable advances or declines tend to be orderly affairs. In the case of an uptrend for example, a healthy, sustainable advance is characterized by the market starting off the day weak or flat and then gradually rising making a series of higher highs and higher lows closing near the high of the day. This signifies "wall of worry" behavior which all bull markets must climb. Of course, not everyday has to be like this for a healthy advance to continue but certainly these types of gap up and run days are indicative of emotional trading which are NOT sustainable. Think of days like today like a boost of energy you get from a sugar rush.
Simply looking at a chart and concluding such and such a pattern exists without taking into account the nature of the advance/decline is folly. Here's a good example of what I'm talking about. Take for instance 2 supermodels. Both are equally gorgeous in appearance but one of them got that way by starving herself and taking drugs while the other got there by healthy dieting and exercise. Which girl would you rather date? Obviously the latter but unless you knew about these "internal" differences you would be indifferent about either girl judging both on appearance alone.
For the past several months the market has been characterized by emotional gap and run days like today both on the upside and downside which is why we have gone essentially nowhere on a net basis due to the unsustainably of such moves. This is a symptom of a market that is being dominated by short term traders getting whipsawed left, right and center. After the collapse of last year the concept of buy and hold is dead and even the so called "professionals" on TV who always preached investing for the long term are now frequently advocating that investors become active with their investing. The problem with this is that day to day volatility will increase significantly as the herd of buffalos stampede from one edge of the cliff to the other. The proliferation of all these 2x and 3x ETFs simply adds fuel to the fire. There needs to be enough long term investors to buy and hold for the market to start acting "normal" again.
But there's no sense in hoping for things to get normal. You have to play the cards you are dealt. I believe this entire move today will get retraced in the not so distant future. If the market closes at about current levels (SPX 925) it will be fully ST overbought. I also believe that the H&S pattern isn’t necessarily invalidated just yet…sometimes a second right shoulder is formed to shake out weak bears.
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