Don’t think for a minute this rally in Q4 has been for nothing other than Wall St. managers trying to make up for a disastrous Q3 and still get their bonuses. Since the end of Q3 we have seen some unprecedented moves with the averages up sharply; DJIA +12%, S&P 500 + 11.50%, Nasdaq Composite + 11%, and the Russell 2000 +15%. They are all up even more from their October lows. And we wonder why the retail investor wants no part of investing or the stock market anymore. This has become nothing more then a legalized casino and the “ONLY” winner is Wall St., whether in good times or bad. It does not matter what the EU news backdrop is, a positive spin is placed on it to drive stocks higher. As long as there is no systemic collapse in the EU between now and the end of the year, Wall St. will ignore any negative news and drive stocks higher to secure their bonuses.
So, if this rally is about bonuses, what does this really mean for the stock market as we go forward? It should mean lower prices in time and maybe significantly lower. Having said that, we do have to realize that seasonalities do favor upside from now until the end of the year and into January but it does not have to go quite that smoothly. A lot has to do with what goes on in the EU; although, the way things have been going of late, all selloffs appear to be being bought with bonuses on the hook. With stocks not too terribly far from their most recent recovery highs of SPX 1192, it would not surprise me to see these highs taken out and a challenge of 1320-1350 broadly defined.
How Low Can We Go?
It is very tough to judge this but after we put in some type of interim high, I think it is very prudent to let the message of the market tell us how low it wants to go. The issues this market has to contend with are very real and easily defined: massive global debt, global slowdown, global deleveraging, and political/geopolitical risks (Middle East tensions building). Oh, and let’s not forget to add to this list an ongoing saga we have in the EU which will not be ending anytime soon.
If in the nearer term (1-3 months) we could actually surmount some technical resistance levels that might point to a breakout or confirm higher prices. If we got that, I would be very weary of this. Technicals do not necessarily take into consideration all of these incredible influences that currently exists in the world.
If we have a mild fundamental deterioration in our economy due to what is going on in the EU, which I think we will get; albeit we have seen some better numbers of late; I think a re-test of the October lows SPX 1075 area is doable. If there is a war with Iran (Middle East tensions building) or an EU collapse thrusting them into Depression; then maybe we could see something much lower then the SPX 1075 zone. Could we even revisit the 2009 lows? It is probably unlikely but anything is possible if we get a Black Swan event.
This market is very tough because it is so controlled and manipulated but I think the word to the wise is to be extremely careful. I think the key will be to see if the “powers that be” can adequately stabilize the global economic scene. Remember one other thing, technical analysis is a tool but probably will not work the greatest in this market which has headline risk almost daily.
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