Trade The Market, Not Common Sense
Jani Ziedins | May 28, 2015 01:33AM ET
The S&P 500 rebounded decisively from Tuesday’s selloff. We opened higher and never looked back, easily reclaiming 2,120 support. Volume was slightly below average and less than yesterday’s downday, but still respectable given this is a holiday shortened week.
Today’s price-action poses a serious threat to the Bearish thesis. Yesterday’s selloff was the crack Bears needed to finally kickoff the long-awaited correction. Nothing shatters confidence like screens filled with red, and we had that in spades Tuesday. But as it turned out, the selling was quite limited as we quickly ran out of owners willing to dump their stocks for a discount. This tightening supply put a floor under the market and the selloff ended as quickly as it started.
If this market was as extended and overbought as many claim, the smallest stumble would trigger cascading wave after wave of selling as panicked sellers rushed for the exits. That’s what happens when markets are unsustainably high, hence describing them as unsustainable. But the perplexing thing is rather than plunge lower, we keep rebounding to the highs. Looking only at the market’s behavior, it is fairly easy to make a compelling argument that this want to go higher, not lower.
The problem many traders have is they spend too much time thinking about what the market should do instead of looking at what it is doing. If the market doesn’t care about rate hikes, employment, inflation, Greece, and all the other jazz, then neither should we. Something will eventually take this rally down, but it will be totally unexpected and not what everyone has been talking about for months.
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