Two pretty big gains for the S&P 500 in a row, it’s enough to make a person think that investors are downright giddy about the stock market’s prospects.
It’s probably just a relief rally, another dead cat bounce…and I’ll tell you why I say that…
Let’s not forget that after the president threatened to fire Fed Chair Powell, and China said they’re not inclined to talk to the U.S. about trade at all. Monday’s market action was just about as gloomy as it gets. Conditions were ideal for a relief rally if the right tweets were sent, and President Trump was good enough to oblige us.
Ultimately, this is still a bear market. The 200-day moving average (which acts as the long-term trend line) is still 135 points higher. Which means we still need another big rally for the S&P 500 just to get close to where we were before Liberation Day.
The bear market playbook tells us that rallies will get sold. If you checked out the Outsider Club’s Chart Wars video from two weeks ago, on April 7, Christian DeHaemer offered up his own bear market playbook…(here’s the link if you want to watch it https://www.youtube.com/watch?v=ADgTWVgnHuw).
Now, like I said, we posted that video on Monday morning, April 7. The S&P 500 was incredibly volatile that day – the range was a massive 8%, putting in a low at 4,835 and a high of 5,246. Hammer’s advice was very simple: be patient, the S&P 500 is likely to rally up to the 5,400-5,500 range, and that’s where you should look to do a little selling, and lighten up your exposure a bit…
Two days later, the S&P 500 did as Hammer said it would. And that relief rally feels a lot like the rally we are getting now. Today’s high was 5,469 – right in the range that Hammer identified two weeks ago.
The bear market playbook says that after a rally like this, the S&P 500 will be lower for at least the next couple of days (and gold will resume its rise). Unless of course, we get some more nice tweets…
“The Whole Economy is a Meme Stock”
I don’t know if you ever read Bloomberg’s Matt Levine’s daily newsletter, Money Stuff. It might be email only because I wanted to share today’s letter with you, but I couldn’t find it on the Bloomberg site. In any event, Levine is a fantastic writer with a very unique perspective on things, and today’s letter was fantastic. Here’s a sample:
“One model of capital markets is that volatility is bad and stable policy is good. Investors are more likely to commit capital to socially productive projects if they expect a reasonably predictable reward. Investing is a way to participate in long-term economic growth, and steady growth helps investors to plan for the future and entrepreneurs to raise capital.
Another model of capital markets is that people like gambling, so introducing some extra volatility makes markets more fun and exciting and gives people what they want. How much should you save for retirement? Should you borrow money to build a new factory? Boring! Boring! Don’t ask those questions! Ask more fun questions like “should I YOLO all my money on GameStop call options?” On this model, economic policymakers should lurch drastically from one policy to another, because that will make things more exciting for their audience. It will also get the policymakers more attention, and attention is the most valuable thing in the world…
Perhaps making the stock market more entertaining, for some definition of “entertaining,” is actually a sort of accomplishment? I don’t know? I don’t especially believe that, but one does want some sort of explanation for everything that’s going on. “The whole economy is a meme stock now, so enjoy the ride” feels like a grim but useful explanation…”
I realize this market volatility is probably not fun for everybody. And I’m certainly not advising anyone to start swing trading options or anything (even though I have executed a few options trades over the last couple of weeks, mostly successful but definitely exciting!)
The most important thing any of us can do is keep a little detachment from the day-to-day swings, keep the view at 50,000 feet. Because if you get bogged down in the minutiae of every market move, every tweet, every hysterical headline, it’s gonna put you in a bad mood, and might lead to investment mistakes.
Cheers,
Briton Ryle
Chief Investment Strategist
Outsider Club
X/Twitter: https://twitter.com/BritonRyle
