The Question for Today is:
Will it Hold?
by Jeff Clark
July 25, 2006
I was preparing to write a third essay titled “Is this Turnaround Tuesday?”
But then, in an effort to mix things up a little, the market decided to ramp higher yesterday.
So today’s question is: “Will it hold?”
That’s certainly a reasonable question. After all, the last two 200 point rally days quickly reversed. And, if you listen to most of the talking heads in the financial media, you’re probably prepared to accept a similar result this time.
But this time, you’ll be wrong.
The market is set up to rally… and rally hard. In fact, given the severe oversold condition of so many technical indicators, I think it’s an odds on bet that the S&P 500 will challenge the 1300 level within the next few weeks.
But there is one thing that keeps me from being stark raving bullish… September is just around the corner. And September is an absolutely brutal month for the stock market.
That’s not exactly a stunning revelation. Most of us know stocks perform poorly in September and the first part of October. Nonetheless, the market somehow manages to sucker everyone in just in time to pull the rug out from underneath…
It’s kind of like Lucy holding the football for Charlie Brown. “Come on Charlie Brown,” she says, “I’ll let you kick it this time.”
Gullible Charlie takes the bait. And, sure enough, Lucy swipes the ball back at the last second and poor Charlie goes flying up in the air and lands flat on his back.
In August, I expect the market to play the role of Lucy, coaxing investors back in just in time to swipe the ball away in September.
Think about it… The market is almost ideally set up for a rally. We have numerous oversold technical indicators; we have a notable divergence in the volatility index; we have investor sentiment as bearish as it’s been since the stock market bottom in October 2002. And, we have the Federal Reserve Board on the verge of ending its interest rate tightening cycle.
“Come on Charlie Brown, I’ll let you kick it this time.”
I don’t think we’ll see a new high in the stock market this year. I do think we’ll get close enough to cause a lot of excitement, and to get investors believing that Lucy will actually hold the ball for us this time.
There’s nothing wrong with playing the stock market for a rally next month. Nothing wrong, that is, as long as we get out before we end up flat on our backs and groaning.
Best Regards & Good Trading,
Jeff Clark
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