Right after the Presidential election, the market went into a downward spiral. It was 7 straight trading days where the market couldn’t even sustain an hour-long rally. Why did this happen? There are many reasons, but the main one seems to be concerns about the Fiscal Cliff. Last week, the market recovered nicely to bring us about 1.5% away from the November 6th close. The big question now is: Where do we go from here?
1) My instincts tell me we still have more correcting to do. Last week’s bounce came on very low volume, telling me the institutions are not backing this rally with conviction. Of course, this could change soon, especially if we see a follow-through day this week on strong volume.
2) Part of the reason the market rebounded last week was that Congress was on vacation. In other words, no one was around to fight with each other and make stupid comments to rattle the markets. Guess what? They come back to work this week. I’m guessing their Fiscal Cliff discussions will continue to drag out, creating more uncertainty in the financial markets.
3) To me, more important than any news headline is the price action of the market. If we can see more stocks setting up and big institutions supporting this market, I would feel more comfortable committing capital.
4) In case I am wrong, I took a few light positions last week to test the waters. I also took some shorts…just in case I am right :). Again, I am keeping everything light and staying defensive until we get a clearer picture.
Although I remain cautious for now, I am extremely optimistic about an upcoming rally. I have talked to many people recently who are VERY bearish about next year. I think they will not only be surprised with the strength of the next new uptrend, but also with the explosiveness we will see in many individual stocks. For now, I think the market needs a little more time before one can get aggressively involved again. Good luck trading!