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Move Higher Continues, but . . . April 19, 2020

Posted by Tom in Thoughts.
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April 17, 2020 – No doubt about it the recovery rally continues. Likely fueled by some positive news in the short term but mostly by FOMO. FOMO means “Fear Of Missing Out”. This typically happens after a sharp decline when most folks just sell and give up. After all of the selling is exhausted the bargain hunters start nibbling to buy; this nuggs the market higher. When no more selling comes into the market price recovers and more buying comes in. The buying continues with the last buyers feeling the “FOMO” pressure, and then . . . Well, we’ll see. The week coming up has some interesting earnings reports.

Those that expect a recovery soon to the previous highs would naturally assume that everything recovers quickly and there are no repercussions. The question is . . Is that realistic? IMHO, the best we could hope for is prices to oscillate around this level. IF there was any bad news, we could go back down and test the previous lows. We’re dealing with a virus and people. Both are rather unpredictable.

NASDAQ Composite Index

Everything on the chart about is positive and “Bullish”. Volume is increasing on up bars showing buyers are in control. But I’ve noticed an up tick in short selling of the S&P 100 Index. This indicates to me that there are some that feel we’ve come too far, too fast and are looking to “hedge” their positions just in case.

Also here is a chart of recent market down turns.

How Markets Recover

You’ll notice that major corrections are rarely (if ever) just a sharp down, then an abrupt move back to previous highs. It also shows that we still remain well above the very long term trend (red line) of market history. Just something to think about in perspective and valuation.

Lastly (food for thought) how did we get so high so fast over the past 3 years?

Borrowed Money to Buy Stock

I believe one of the major factors was low interest rates, and this is indirectly shown in the chart above as investor credit or the amount of “margin” credit. Briefly, if you borrow money from your broker to buy stock (because it’s going higher) and all of a sudden the prices plummet, you get a “margin call”, that is you have to come up with that borrowed money quickly, or the broker sells your stock (quickly). I think this was a big driver of why the market went down so fast.

Lastly, here’s a table of short term sector strength.

I am very selectively long with a fair amount of Cash. Looking for a better opportunity to deploy that Cash. Have a good week & Stay Fast ! ….. Tom ….

Price chart by MetaStock; pie chart & table by http://www.HighGrowthStock.com. Economic charts by Doug Short. Used with permission.

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