Breakout

The rally has begun - here's how to play it

Jeff Macke
Breakout

With less than two hours to go in the trading session on Tuesday it looked like we might be watching the death throes of the five-year old bull market. The S&P500 (^GSPC) was down over 1%, the Nasdaq (^IXIC) was collapsing below support at 4,000 and there seemed as if the last of the dip buyers had finally run out of cash.

Just when all seemed lost the market staged one of the snapback reversals that have been the defining characteristic of 2014 thus far. Cynics would suggest there was something artificial (read: “rigged”) about the start of the rally but that didn’t make it less impressive. Paul Schatz of Heritage Capital says yesterday wasn’t the bottom for stocks in the big picture but says the trading set-up clearly favors the bulls.

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“It’s a trading bottom,” opines Schatz in the attached video. “To me it’s pretty clear: if you close below the lows of the reversal day you’re clearly wrong and you get out but I think there’s enough indication to at least warrant a trading rally.”

For the record those lows are roughly 3,950 on the Nasdaq, 1,820 on the S&P 500 and call it 16,000 for the Dow Jones Industrial Average (^DJI) (NB: when in doubt round to the nearest big round number). Those acting on Schatz’s idea would buy stocks now and sell if or when the market closes below those levels. Trades don’t get less complicated in terms of controlling downside risk.

None of which applies to longer-term investors who are probably better off ignoring all the mania and sticking to their long-term plan. Days like yesterday are certainly more entertaining for market watchers but they’re also a sign that all is not well in the financial world. There’s no fundamentally rational excuse for the value of the U.S. stock market to vary by about half a trillion dollars in less than 7 hours.

The animal spirits are in control of the stock market for the time being. Be careful out there.

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