As I look now the futures are at 2071 suggesting a 2076 open @ fair value. Just a few days ago we touched 1976. That’s nearly a 100 point or 5% rise in a matter of what 10 trading hours? Incredible. I think the most market participants are jaw-dropped. It’s the way 2014 has been – the year of the V-Shaped rallies. Look at the chart below. That down was something else, but that up was even more sudden. I explain below the likely reasons for these rallies.
These types of rallies are by in large caused by a few things
1) short-selling and subsequent covering. It’s momentum. Once the bull starts to run, you get panic shorts hitting the stops and being forced to cover (buy stocks back) which further fuels the rally. As long as you have a large amount of skeptical bears in the market, you’ll get these violent rallies. This is typical of a bull run that has a lot of negative sentiment accompanying it ( i.e. like we’ve had the last few months : weak data, oil problems, Ruble problems). There’s a lot of shorts and if they break their stops, this causes violent upswings.
2) In the October fall, you had a lot of funds/institutional investors underweight equities after the very sharp reversal. It gave few any time to get back in and many waited for the typical pull back after the first fall. Most of the time on a downtrend that strong, you’d get a second leg or at the very least some stalls and retracements at fibonnaci resistance levels. They can only go so long for the predicted pullbacks until conceding defeat. This pullback did not happen in October, the up was relentless and broke all sorts of records. The under-weighted institutional investors perpetuated this rally as they chased it. The pressure to buy was strong. Simply put, the pressure to at least match the market is strong for these types of investors and they simply can’t underpform the market or else they look foolish. That fueled the rise in October and likely fueled this one as well. This fall was a gift for the ones still underweight and as soon as the selling pressure stopped you got a massive up-swing like we’ve seen the past few days. Everyone was hoping for a dip, they got it and the old adage ‘fool me once’ probably played a role in the even more sudden V-rally this time around. On just a bit of strength everyone pounced in. Nobody wants to miss the next V-rally especially after they’ve been praying for a large pull-back.
At close there was a p-bar that touched 212.97 on SPY. Likely that’s the target for this bull run. The season favours the bull as well. They call it the santa claus rally. I’d expect strength going into the end of the year.
I am out of the MIC and in just the SPY/TLT and Anchor trades at the moment. Yesterday was a good day for the anchor.