Why Bears Should Have Seen This Rebound Coming
S&P 500 Index Daily Chart
The S&P 500 surged 1.3% Thursday after we got a few more pieces of data showing inflation continues falling.
Sure, inflation’s retreat is slower than most hoped for or even expected, but most sensible people agree we avoided the worst-case scenario the pessimists were predicting last year. Less bad-than-feared has been the name of the game this year as stocks continue trading near recent highs.
If we look at the headlines that allegedly triggered Thursday’s surge, they are fairly benign. That means it wasn’t the headlines driving this one-way buying frenzy, but traders reacting to the price action. More specifically, overly ambitious bears getting blown out of their short positions.
Lucky for readers of this blog, Thursday’s reversal didn’t catch us off guard. As I wrote yesterday:
While a short squeeze produces quick profits for those of us lucky enough to be positioned on the right side of the reversal, the downside of short squeezes is they don’t have much-staying power.
As nice as riding Thursday’s wave higher was, savvy traders are standing next to the exits if they are not already locking in worthwhile profits.
As I’ve been telling readers for months, this is a back-and-forth market, not a directional one. While the headlines are less-bad-than-feared, that’s a long way from being good enough to send stocks back to record highs. Until something changes, expect stocks to continue trading sideways inside the 3,800-4,200 trading range.
No doubt it is hard to pull the plug on a trade that’s working as well as buying Thursday’s rebound, but it is far more painful to watch a winning trade turn into a loser because we got greedy and held too long. Just ask greedy bears that watched all of Wednesday’s short profits vanish into thin air.
And you know what? If we end up collecting profits too early because Thursday really was the start of the next big run to record highs, nothing prevents us from buying back in on Friday or next week.
Until proven otherwise, I will continue taking profits early and often because up to this point, the reversals have never been far away. If we’re not taking profits, then we will get stuck taking losses a day or two later.
This pattern will change at and we will eventually get a bigger directional move, but this is not that point.