Buy the Fear and Sell the Cheer

End of Day Update:

The S&P500 continued its hot streak Thursday, closing in the green for the third consecutive day and rallying nearly 200-points over three-weeks. This leaves us just shy of 2,000 and well above the 50dma. Not bad for a market that had been written off for dead in early February. Just goes to show what the herd and experts on TV know.

In my February 11th blog post, I reminded readers that markets move in waves and that period of weakness represented a buying opportunity, not a place to sell defensively. Now that we find ourselves just shy of 2,000 resistance, I will remind everyone again that markets move in waves and this is a far better place to be taking profits than adding new positions. While seeing the market bounce this high brought relief, we cannot forget risk is a function of height and right now we are near the highest levels of the year. Rather than feel good about these gains, we should be growing paranoid.

Friday morning we get the monthly employment report. Maybe it will be better than expected. Maybe it will be worse. I have no idea and I won’t pretend to. What I do know is the recent rebound sucked up a big chunk of the available demand, meaning there are far fewer willing buyers prepared to jump in this market than there were two-weeks ago. No doubt momentum could keep this move alive a little longer, but it would be foolish to assume we could rally another 200-points over the next three-weeks. If this move is closer to ending than starting, we should be thinking more defensively than offensively. While I don’t know what employment will be, I do know it will be far harder to keep this rally going than it will be to stall and consolidate recent gains. Successful trading is not about predicting the future, but understanding probabilities.

The ideal short setup would be a price surge following a stronger than expected employment report that fizzles and stumbles into the red before the end of the day. Failing to add to recent gains on bullish news tells us demand is drying up. No doubt the talking heads will spin it as good-news-is-bad-news, but we know better. Things are a little too good right now and inevitably the pendulum will swing the other way in a few days. But rather than jump on the world is ending bandwagon, we will buy that dip and ride it back to the upper end of the trading range.

For a trade, short a rally that fizzles and falls back under 2,000 resistance. Most likely it will retest the 50dma and even 1,900 support before bouncing and giving us another dip buying opportunity. While things look less scary than they did a few weeks ago, not a whole lot has changed and we should expect this trading range to continue through the end of the quarter. Keep buying weakness and selling strength.

Jani

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