The dip this morning in the market direction held easily above the important 1975 level. This brought in investors who quickly bought the early morning dip and pushed stocks still higher. The dip has been a strategy used by investors since the start of 2013 and for good reason. It works and provides superior returns even if the underlying index itself remains with anemic percentage gains after last year.
Market Direction Chart SPX From 2009 Bear To Aug 20 2014
The SPX chart below shows just how strong the bull market has been. Since the bear market low in 2009 the SPX has risen strongly. The initial rise from the bear had a smaller correction in 2010, a strong correction in 2011 and then a 10% correction in April 2012. That has been the extent of large pullbacks in the recovery from the bear market. Since the start of 2013 you can see why the “buy the dip” has been so successful. The move higher has been steady and relentless. It has also confounded most analysts.
SPX since 2009 to Aug 20 2014
The Second Shoe Scenario – Spooky
Two big bad bear markets since 2000 have spooked analysts and investors. When the second major bear market occurred in 2007 to 2009, analysts kept warning that the “second shoe” was about to drop. Each time the market corrected in 2010, 2011 and even in 2012, analysts jumped in and announced that the bear rally was over and the supposed secular bear market which had been labeled a “super secular bear” was starting. They were of course wrong but their dire warnings kept investors out of stocks year after year. Once the market broke the old market top highs in 2013, many retail investors jumped back in. This has resulted in a gain of 26% since the old market tops were broken and a push almost straight up with hardly a breather for almost 2 years.
Two bear markets spooked analysts and investors
Over Stating The Obvious
Now analysts keep warning that this cannot continue. The trend up will break, they keep warning and stocks will plunge. Many are calling for at least a 20% correction. This is stating the obvious. At some point the trend higher will break, but even a 20% correction still will leave markets above the old market tops. In other words, the supposes “super secular bear market” was a myth. All analysts did was spook investors to the point where their returns have been simply terrible and most have missed out on the greatest bull market of our time. Even those who jumped back into stocks in late 2012 or early 2013 and have reaped a 26% gain on their portfolio are still stinging from losses in the past bear market that are still not wiped away.
The problem is analysts do not want to get caught off guard and fail to “call” the next downturn. Due to this they are calling every little dip and weakness the start of another market collapse. However in trying to be the “first” to call the next correction they are simply spooking more investors once again. This tells investors to turn down all the rhetoric and trade what they see in front of them. In other words, apply capital now but remember to trade often and trade with an exit strategy always in the back of your mind.
S&P Will Reach 2000
There is little doubt that S&P will break through to the 2000 level in this latest rally. From there stocks should be able to tack on a percent at least before investors again take profits. At this time I am using the 1975 level for my guide to the watch for any possible signs the market direction rally up is in trouble.
Market Direction Outlook Into The Close
Into the close today I am expecting the market direction to continue sideways but I think there is a good chance for a trading for pennies strategy trade in the last hour or half hour of the day. I will be focusing on that into the close.
Meanwhile I believe the SPX will probably close around the 1983 level. The Dow appears by tomorrow or Friday that it will try to challenge 17000.
A lot will depend on the Fed comments from Yellen from Jackson Hole but overall I am expecting nothing really new from the Fed at this time and you can tell from the market action that most investors think we are going to hear the “same old” comments as before. Let’s hope we are right.
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