Recent rally in stock markets

[qcomer]

Hi,

I need advice from Chris or other traders around here about the recent stock market rally. I have made some good money investing in Tech (Semis) in the last two months since the Fed stopped raising rates based on my research and recommednations I had got. I seem to be thinking since last week that stocks have maybe pushed their luck too much now and this rally will be breaking down soon and I want to take my profits. But to my surprise, this rally just keeps going and going and I cannot seem to pull the trigger.

So, firstly what do traders here think about the recent rally and how long it may last. I am not addressing long term investors but people who trade frequently. How long can this rally go and why has this rally even gone that far (I am pleasantly surprised)? Is there just too much liquidity in markets and people don’t want to sit on cash (afraid of the dollar collapse)? Or is it the mentality that it doesn’t matter until one day it suddenly matters the most?

Second question is for the long term and maybe for people beraish on stocks here and those expecting the mid term election rally. The market is forward looking by atleast a quarter (I think two) and it seems to be expecting no severely harsh decline in corporate profits by the next year when bears here are expecting to see the start of a recession? Retail stocks are doing well and BestBuy is reporting good numbers? For some reason, the American consumer just doesn’t seem to be dying the death that has been predicted for its spending habits?

[lewman]

I suspect there’s a possibility that the mid-election year rise might have already started in July. If you look at the S&P500, mid-election year rallies didn’t always start in the fall. What has been “abnormal” is that previous mid election year rallies were all (at least the ones since 1962) preceded by a rather sizable decline. So far we haven’t seen that sizable decline.

As the likes of Best Buys are showing, consumers are very resilient and in my opinion that’s due to still relatively low rates and loose credits. Savings rates have gone negative and there’s no telling how negative it could get before it turns around, especially since countries from china to japan continue to be willing and able to supply us with cheap money.

[(former)FormerSanDiegan]

“abnormal” – Not really …

We’ve already seen a decline on the same order of declines in mid-election years 1986 and 1994.

This mid-election year stock market activity is very similar to both 1986 and 1994 in scope. In both of those cases there were declines of less than 10%. In 1986 there was one retest of the low (after a failed rally). In 1994 there were multiple re-tests of the low (three failed rallies) in the spring/ summer and fall before the final rally started.

In 2006, the market dropped about 7-8% from the mid-May peak to the early June low and there were several periods in June/July where the market traded significantly below 1250 before moving up in Late July. This is very similar in size to the activity in 1994. We may or may not have another re-test or two at the range of 8-10% below May’s peak or we may be in the rally now. Either way, this year is not really abnormal. It’s following the same script (so far) as the 1986/1994 mid-election year markets.

[lewman]

FormerSanDiego you’re absolutely right; thanks for pointing that out. I’m tempted to test the mid-election rally theory with real money and it’s giving me more faith to go thru with it.

[(former)FormerSanDiegan]

lewman –

I’m testing with real money, too, but without putting all my eggs in one basket. I’m a firm believer in diversification with occasional shifting of assets as a hedge or as opportunity knocks.

I trimmed back my long-term retirement account stock holdings earlier this year to about 50% of my holdings (rest mostly in cash, with dashes of REITS and commodity ETFS) from a recent normal (for me, anyway) of about 75% in anticipation of this trade.

However, I have yet to significantly buy back in, since the previous dips were rather modest. Hopefully, we go back to 1250 or below over the next month or two (it is Sept-Oct isn’t it?), then I will put some back to work.

[Anonymous]

Chris Johnston

I have been expecting a decline to start for the last couple of weeks and have been wrong. This is a very abnormal year in many ways thus far. I have commented on this in my blog as it relates to seasonal tendencies that have repeated over and over. Yesterday for example the 7th trading day of September has produced short profits in 24 of the last 25 years until yesterday recorded it’s second loss.

In years where we are not following the seasonal pattern at all, I do not expect what typically occurs to happen. We need to measure how well we are following a seasonal pattern at the time to determine how likely it is to conform to it going forward. Since we have completely diverged at 2 key times this year, I would say that it is invalid for the balance of the year.

The trend is solidly up at this point so shorting this rally is a tough call. I am still in cash waiting to see if we get a fall dip setting up the rally I have been talking about all year in this blog. The previous post about most of these election years have launched out of declines, but not all of them is correct. These election year tendencies are followed by big money, so they “front ran” the fall it appears.

The big rally in bonds has in all likelihood been behind this. I would advise to take partial profits, and tighten up the stops. I am not of the mind set that this monster recession is upon us as I have stated in here many times. However, I would not be surprised if in the second half of next year we slow down a good bit.

My plan is still to wait for Oct/Nov time frame and watch the commercials and bonds to see what they are doing. If they are in proper position, it will be pedal to the medal for me. It does not appear at the moment that a big drop will happen, but maybe we will get lucky.

I am not sure if that is of any help, you caught this upmove and I did not in my long term accounts. Historically buying when this low was made has not been wise, but this year it worked. I have gotten alot of the rally in my short term trades fortunately.

Roubini apparently is a smart guy but I do not know his track record for picking market swings or if he has made any money doing it. I do not pay any attention to economists.

[The-Shoveler]

Nor_LA-Temcu-SD-Guy

I have been out of the market sense January, the Stock or should I say index “QQQQ” I was mostly invested in was 41 when I sold it, been below that point most of the year, made more money in a CD than most stocks have done, will stay on the side , who knows maybe I will get brave and short the qqqq’s if it continues to run into October. I will not invest in individual stocks long or short, too hard to play against the house (the stock brokers in NY).

I Kind of think of the stock market like the housing market, best to sit on the side for now.

anyway good luck to you

[lewman]

Chris, you mentioned the mid-election fall rally trade is intended for your long term investment account. The trades that you mostly speak about are measured in days if not hours. So by long term what do you mean ?

[Anonymous]

Chris Johnston

Lew – in my world long term is pretty much 6 months or more. The mid term trade is a two year hold in general, although I doubt I would hold it that long. It is unclear if it will set up at this point.

[lewman]

Thanks Chris.
Short interest’s at 5 year high now; may be we’ll get a drop into october for the mid-term trade.

[Anonymous]

Chris Johnston

I hope you are right lew, this rally being this strong has been a big surprise to me. I did think we would see one but not up this high.

[The-Shoveler]

Nor_LA-Temcu-SD-Guy

Wow it’s almost enough to make you want to go short.

Any of this recent market action make sense to anyone,

I mean look at LEN or CTX up over two, I don’t think anyone is saying housing is going to shoot to the moon anytime soon.

I mean who is going to buy the track home from you for 900K that you bought for 750K last week.

Crazy I tell you.

[Author]

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