The Bounce Continues
Russell Soars 7% In 5 Days!
The Title of Last Thursday’s FLS intra-week update was “Time For A Bounce.” We made the case that the market was ripe for a bounce and that is exactly what has happened over the past 5 trading days. It is important to note that the Fed is still printing money and the”bounce” has been exceptionally strong. In fact, the Russell 2000 soared nearly +7% since last Wednesday’s low! That is a huge amount for less than a week. Be very careful chasing after a big move. But that is also consistent with what we have seen over the past 5.5 years as the easy money stance from global central banks has caused a surprisingly strong “bid” in the market. Remember, we are still in a bull market and surprises in bull markets tend to be on the upside. The bulls are doing their best to “repair” a lot of technical damage. It is bullish to see several of the popular indices trade back above support of their large topping patterns (effectively negating the topping pattern…for now). The S&P 500 is back above 1904-1905, the Russell 2000 is back of 1082 and the DJIA is back above 16,333- all encouraging signs. More time is needed to see if this is just an oversold bounce or a normal pullback within this very strong bull market. We have had a very good year and do not want to get caught in this wild back-and-fourth/sloppy action. We want to let the dust settle and look to get back in when favorable risk/reward entries develop. We are still in the heart of earnings season and that will dictate a lot of the near term action for individual stocks. Put simply, the bull market bent (hard), but did not break (yet). At its deepest last week, the S&P 500 pulled back -9.86%, missing the closely watched -10% level.
Bull & Bear Traps:
A quick note on bull and bear traps. There is a concept on Wall Street known as a bull or bear trap. The idea is simple, in a bull market there are big shakeouts (pullbacks/corrections) that occur which or normal or healthy but shake out the weaker hands. Then cooler heads prevail and the market (or stock) hits new highs again. In downtrends (bear markets) the opposite is true. Be very careful if this is the start of a larger downtrend (All depends on what happens with QE, in our opinion) then you will see several large “big rallies” that are seem very strong and attractive but they are followed by new lows shortly thereafter. That is the nature of markets (reflection of human nature) and this phenomenon will continue to play out as long as human’s continue to trade stocks. The largest rallies in history tend to occur during bear markets (not bull markets) for this exact reason. So be very careful to avoid getting whipsawed in and out of markets/stocks during volatile times.
The FLS portfolio locked in several large gains (+18%, +16%, +5%) & last week and is in cash at the moment. Keep in mind, the market is not going anywhere, the tide is rough right now (large swings up and down). Thankfully, we have earned the right to sit back and let the market calm down before getting involved heavily again. Right now, patience is king.
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