The S&P 500 finished in the green for the fourth day out of the last five trading sessions. And that single red day slipped an imperceptible 0.07%, so does that really even count as a down day? Probably not…
It’s been a great run since the July lows. Just when it looked like we were on the verge of another scary leg lower, the index rebounded 600 points instead. So much for listening to popular opinions.
As I reminded readers at the July lows:
Inflation remains bad. Same with the war in Ukraine and as expected, consumer sentiment is in the toilet. But everyone already knows these things and that is why the index is down 23% YTD. Recycling the same headlines doesn’t surprise anyone and that’s why this week’s bad news hasn’t sent stocks tumbling under June’s lows. The people who fear these headlines sold months ago and that means there is no one left to sell a retelling of those same headlines.
That day the index bottomed at 3,721 and it hasn’t looked back since. And here we are, almost exactly one month later and the index just crossed 4,300.
Who could have seen this coming? We could!!! That’s because these things always happen. Stocks bottom when everything looks their worst. And it didn’t get much worse than the highest inflation in 40 years and the biggest war in Europe since WWII.
But now that everyone is feeling better, is it time to relax? No of course not!!! This is when we need to be the most paranoid.
While it didn’t feel like it, buying in July was actually safe because stocks were already heavily discounted and most of the damage had already been done. But now that the index rallied 18% from the summer doldrums, we find ourselves in the exact opposite situation. Stocks are now pretty darn expensive. That 600-point rally consumed a whole truckload of upside, meaning there isn’t a whole lot left in the tank.
And let’s not forget, we are still stuck with the highest inflation in 40 years, a war in Europe, the most aggressive Fed rate hikes in decades, and an economy that might or might not be in a recession.
The market loves to overdo it. It went too low in June and July. And without a doubt, this rebound will end by going too high. The only question is if this 200-point rally in five days is what finally pushed us over the top.
While I’m not in the business of picking tops, this is pretty darn high and at the very least, we can say the risk/reward is no longer lined up in our favor. With at most, one or two hundred points of upside left in this rebound, and as much as 400 points of risk underneath us, it is really hard to like buying this risk/reward.
I’m more than happy to keep riding this wave higher as long as the easy money continues rolling in (I’m holding and lifting my trailing stops), but I’m standing next to the exits because this won’t end well for the people that stick around too long.