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Is the market rally sustainable?

Last week we experienced an incredible market rally. The S&P 500 rallied from a several weeks long bearish craziness to a bullish madness by 5.86%. What is crazier is that this, almost, 6% rally took just 5 days to happen. On average, this rally consisted of a 1% a day move. And now, the question is, is this market rally sustainable?

market rally

This crazy move could be just a relief rally before we resume bearishness, but we need to wait to see what happens next. Why? So far, we only reached the previous support which now acts as a resistance, and we may bounce from there down.

I was thinking what has changed in the market? Well, the answer is simple: nothing. Let’s review:

The bearishness was based on silly behavior from investors who were scared of a known event – interest rates. But that fear was irrational. Everyone knows that the economy is still strong, that the labor market is still strong, consumer spending is strong, and inflation is easing. Yes, in September and October we saw an uptick in inflation but that was a very small uptick. It didn’t change the trend. Yet, the investors freaked out and kept selling. And the selling lasted for two months!

But last week, the GDP came in lower than expected, Jerome hinted longer pause in hikes, and these same investors who were panicking for the last two months started buying like crazy.

Interestingly, last week’s rally caught a few big hedge funds with pants down causing them losing a lot of money.

So, are we out of the woods? I think not. This type of violent rallies are usually overblown and attract sellers. But we need to put this into perspective. People fail to do it. They look at today’s or yesterday’s price action and make conclusions.

A good way to determine if the market rally is over and we are in a bear market again, is to zoom out:

market rally

Are we in a bear market? No. Was last week rally just a bear market bounce? No (twist it anyway you want, it was not a game changer). The longer-term market still shows very clearly that we are in a secular bull market.

Will it last?

Yes, the market will go up. But maybe not next week. This rally was not sustainable, and I expect some type of a correction. I think, we will bounce down on Monday or early next week. But eventually, earnings will win this over and we will resume uptrend.


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