We’ve just seen a magnificent 20% two month rally in the S&P 500 index and stock market in general. Yesterday it opened just a bit above 2800, a target area discussed in What to expect next?. But then slid lower for the day and finished just a bit below 2800. Snap back rallies are very typical for bear markets and while the current bounce would constitute as a very typical one, the strength surprised even some bulls. What is a bit untypical is that until this point we haven’t seen any form of a shakeout yet (see more in Typical bottom).
The US markets were in a bear market in Q4 ’19 and some other markets were in a bear market for the good bit of 2018. While we might be seeing the first signs of the new bull market emerging (see Is it over?) we must not get overly excited at this stage. Does this mean we must be going to cash or even get short? No, not at all.
But we must respect a possibility of a quick and nasty shakeout, meaning we must respect risk and manage our positions accordingly. Even if we think the worst might be over, we could be proven wrong later.
Here is a daily chart of the S&P 500 index, SPX. It’s trading at an upper range with a flattish 200d SMA pointing to choppy conditions ahead.
I think it would be foolish to believe we won’t see a shakeout to level 2625 or perhaps even lower before the market decides to continue higher.
However, as I wrote many times before, I am not in the doom and gloom camp. I believe a new bull market could be starting to emerge right here right now, so I will be searching for pockets of strength. What will you do?