Why the Sucker’s Rally?

The stock market has rallied over 470 points in the last 2 sessions. I can think of a few reasons why this is so and each of them is ill-fated.

  • Oil posted record nominal losses over the past few days plummeting from 147 to less than 130. I believe that Oil has more to rally. Moreover, if it is indeed a bubble analysts should expect more gains driven by record highs, not less.
  • Housing Sales jumped slightly, signaling an end to declining prices. Lower prices will gain momentum only through increasing sales.
  • JPM posted profits. Many may believe this signals the bottom for the Financials which would be good for the general market. JPM’s profits were not including the loss from the Bear Sterns bailout. This is like excluding inflation from the CPI.
  • Short Covering. Many traders may have reached their targets and seeing resistance from the SEC and are bailing out with the trend. It’s only a trend that will be short lived as a lot of the excess shorts are bought back.
  • Technical Support. There is some support around the 11,000 level. I previously placed my short-term downside at 10,350 and then expected markets to be volatile to 11,500 and back. In best case scenario, markets have locked in a higher trading range and will be volatile to a bit over 12,000. Worst case, there’s plenty more room to fall, especially over the next few months.
  • It’s a Sucker’s Rally! They say if you try to make sense of the ups and downs of daily trading you’ll drive yourself mad (this is why there are no Day Traders who follow fundamentals – there aren’t any!). This is no different and if Friday shows a reversal the 2-day rally won’t even show up on the long term charts!

Remember, this is not the genuine decline but a speculative one – hence driven more by shorting. When corporate profits dive and the consumer takes major hits because of inflation (commodities rally filters through the system). That’s when the real panic will start and small selling will begin.

Have a Great Weekend!

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