The short answer is yes.
A week ago, when we were writing an article just like this one, the S&P 500 (SPX), was sitting below 1965, and trying to recover from the first sustained correction since the early spring of 2011.
It really wasn’t much of a pull-back, although at the time it felt like the bottom was falling out. The SPX was down about 200 points in 18 days, and the Bears were dancing in the streets. The market was struggling back up, but it could easily have been a dead cat bounce, destined to fail, and soon.
At the risk of saying we told you so – aw, who cares; we did tell you – we said the Fed would not allow the market to decline before the mid-term elections this week (if ever) and warned that a move above 1990 would squeeze the market back up above 2015.
And here we are, bumping up against a double top at the high for the year, thanks to massive new Quantitative Easing, not from the Fed but from the Bank of Japan (BOJ).
It could easily have gone the other way. The market was faltering, and a little push would have been enough to send us to new lows.
The “unexpected” intervention by the BOJ, just as the Fed was withdrawing, saved the day. Hooray! We dodged the bullet, again.
What Happens Next
Was the market manipulated back up? Of course it was. It has been manipulated up at critical moments for the last four years. The question now is: will it stay up?
We think so. Here is our reasoning.
- There may be a little back-and-forth and a small retracement leading into the mid-term elections Tuesday (Nov. 4), but Wall Street is heavily invested in a Republican win (political contributions from Wall Street are the biggest they have ever been for a mid-term election, and 70% went to the Republicans, according to the Center for Responsible Politics). Look for a rally Wednesday if they get what they are expecting, a Republican senate.
- We are just entering the best six months of the year for stocks, and the best two months for consumer spending. The post-election period could hold some nasty surprises, but we don’t think Santa will be handing out lumps of coal this year. Later, maybe, but not yet.
- The Fed still has a finger in this pie. QE may be officially ending, but the Fed is not withdrawing from the markets. For one thing, the interest earned on the Fed’s massive portfolio will probably be “reinvested” and maturing bonds will likely be rolled over. They may not be putting new money into the market every month, but there is no sign they are planning to take any out.
Short-Term Outlook
After rallying strongly for seven days, the market is overbought, and that may pause the relentless march higher. But it will only be a pause.
The Dow, the NASDAQ and the SPX all closed at 52-week highs on Friday (Oct. 31) and all are above their 50-day moving averages. We have made a “V”-shaped recovery from the early October declines, and that is a powerful pattern on the chart. It is possible to drop back into the pocket of the “V,” but we don’t expect that.
You don’t need to be long in this market (although we are). At some point the market will crack and there will not be time to get out with your profits intact. But you better have deep pockets before you try to short it. That light at the end of the tunnel is likely to be a train steaming toward the Bears.
How To Trade It
Our preferred trading vehicle is the mini-futures (ESZ4) on the S&P 500 and options on the minis.
In the short term, the minis are also overbought, and we expect to see a little profit-taking and a pullback before the mid-term election. But the pullback will attract new buyers; expect to see some buying on the dips.
The 2000 level becomes a short-term pivot. A move below 1998.50 could see a further drop into the 1989-88 zone (long entry) to fill last Friday’s unfilled gap.
Remaining above 2000 could lead the minis to consolidate inside last Friday’s regular hour trading range to release the overbought pressure and prepare a move to new highs.
Major support levels: 1998.50-99, 1988-87, 1972.50-75, 1956.50
Major resistance levels: none
