By Alex Salomon
Some trading months are just blessed by the Gods. Ironic for an agnostic like me! Take January 2011/2012: one could simply pick a couple of 2x or 3x ETFs and ride them for huge profits. Just ride them. But as is human nature we get greedy and try to outsmart the market. Try to be smarter than everyone else: let’s pick the perfect top to short and make another 10-15% on the downside.
Okay, I’m having a little fun here, but you get the point. It’s only human nature… which is why it’s inherently flawed.
Come on, confess it: if you made out like a bandit in January, you probably have been thinking about shorting a bit at 1300 [on the S&P 500, referred to as S&P from here on out]. Then 1325… then 1340. Then 1370. Once. Twice. Then at 1400. Many traders think there is a prize for who calls the bottom, the top and Apple’s demise. They know there is no such prize yet they choose to think that “this time will be different” and there will be a nice reward.
Over the past two or three weeks, the more we bounced against S&P 1400, the more calls there were for a top at 1420 or 1440. Furthermore, articles and posts on the subject have blossomed nicely. Therefore, taking the contrarian point of view, I started to wonder if “everyone” calling far a top was the signal I needed to target the road less traveled… To plot the following market treachery: what if we see S&P 1500 before a correction? (and correction there will be!).
Let’s gather the hints that could potentially lead us to the more lonely path of 1500:
1) The foundation is contrarian: With many calling for the correction now and a few only calling for 1500 or 1600, the market could, yet again, betray the larger crowd
2) Historical valuations are not crazy yet: Actual P/E is getting richer yet still historically cheap
3) Some interesting momentum indicators are “sane”: Worden T2108, McClellan, OEXA200R have worked off their overheating conditions and build in room for newer overheating
4) Psychology: If we were to push and burst past 1440-1450, greed and fear of “missing out” could fuel the ride
So how do we get there?
Let’s start by thanking all the fund managers for window-dressing and marking up the end of the quarter and pushing us to 1425 by April 1. Then let’s thank the Semiconductors Sector (SMH) and Intel (INTC) for having corrected over time (not price) for the past 6 weeks. On a breather since February, they will kindly play catch up and help the still strong Financials Sector (XLF) to lay the ground for 1440-1440 by April 8. At this point, my twitter account will implode with calls for a top — exactly what we need!!
With Apple’s earnings due on April 20, we will have a fake and shallow respite back to 1415 (until April 15), before an earnings season that will bring us two pieces of important news: the world did not end last quarter and overall, P/E valuations are still cheap. The build up will be in place and all the parts will be in motion. We should see 1460 by April 22 and an accompanying wave of greed and fear of missing out will push the S&P 500 to 1500’s door by May 6. And this will be right on time for the French to elect a socialist and mark a well-timed seasonal top – “Sell in May and Go Away!”
~ About Alex Salomon: Alex is an entrepreneur with a passion for RFID and NFC (mostly NFC!). He has been trading for 13 years and enjoys all things related to the financial markets. His trading style is agnostic: Doesn’t believe, adapts — trades longs and shorts. Alex shamelessly mixes technical analysis and fundamental reading, while keenly devouring domestic and international news. Alex would like to thank Andy Nyquist for his selfless work, Nicolas Darvas’s writings, Eric Wish, Todd Harrison’s Buzz & Banter, Scott Redler; and a special mention for Quint Tatro, whose generosity made me a better trader.
Any opinions expressed herein are solely those of the author, Alex Salomon, and do not in any way represent the views or opinions of his employer or any other person or entity.
The author has positions in mentioned/related securities INTC, FAS, SOXL at the time of publication.