After last week’s remarkable U.S. stock market rally, a lot of investors are cheering. After all, the Dow made an all-time high, won back the lost 1,000 points, and ignored the 8% pullback.
I hate to be a party-pooper, but this is not a time to celebrate, but rather to be cautious.
What could go wrong? Let’s begin by analyzing last week’s hollow Halloween rally:
1. On Friday, Oct. 31, five stocks were primarily responsible for Dow’s advance. The previous day, Visa
had accounted for around 123 points of the 221-point rally. Take away Visa and the rally was a lot less impressive.
2. Friday’s surge was prompted by the Bank of Japan, which promised more stimuli (I’m guessing they are on QE 35, but who’s counting?) Since March 2000, the Nikkei 225 has tumbled from 20,000 to 16,000, so maybe more stimuli from the BOJ is needed (just kidding).
3. On Friday, there were no plus-1000 ticks on the NYSE Tick, which tells you that the rally was another head-fake without institutional involvement. Typically, you will see at least four or five plus-1000 ticks on bullish days.
4. In addition, volume was low, especially for the last day of the month.
5. Moreover, the SP 500
that day did not rise above its overnight high, which is generally a sign of domestic weakness. During the day, it did not take out the previous all-time high. If this were a true bull market, breadth, volume, and institutional presence would have been a lot stronger.
6. Only five out of 20 stocks led the transports. If this were a broad-based rally, more of the transports would have participated.
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Trading lessons from a short-seller
Even with these facts, many investors are enamored with the Dow Jones Industrial Average
. If you’re not sure what to do, let’s see how one famous short-seller managed to make a profit during the 1929 crash.