There is a high percentage of individual investors and traders that have described their six-month outlook for the U.S. stock market as “bearish”! It’s just that simple…General market sentiment has spoken and it’s all over the charts! Just have a look at the highs on the S&P in early January when markets were sitting at $4803…Now look at the S&P 500! It has since done a consistent job of moving lower and lower. As of Friday's close, even with two sessions closing higher, we’re still 9% off of the Jan highs and are still positioned below the 200 SMA!. With that being said, the “optimistic bounce” we saw which started on Thursday and carried through into Fridays close, was still "well below normal levels."
So what was the rally about??? Simply put…It was a “suckers rally” or more appropriately, a bear rally!...I think! We'll have to wait and see what happens in the coming weeks!
What Is a Suckers Rally? (Better Known as a Bear Rally)
A sucker rally describes a price increase that quickly reverses course to the downside. Sucker rallies often occur during a bear market, where rallies are short-lived. For example, The S&P has lost 10% of its value since early January. Price initially stepped down, creating a big bear flag which ended up playing out and moving to lower levels. Even though the markets were paring back gains and moving lower, price action did need to take small breaks to rally. Those small, insignificant rallies are what's referred to as a “suckers Rally” or a “bearish Rally” or a short term “ Relief Rally”. Despite what you want to call it, the facts are that price is still experiencing downward pressure and even though we just had two huge days of price action movement to the upside, it doesn’t change the prevailing trend since January 4th…bearish! Sucker rallies occur in all markets, and can also be unsupported (based on hype, not substance) rallies that are quickly reversed…This is what really needs to be taken into consideration. This might not be the time to “buy the dip”.
Understanding the Sucker Rally
Sucker rally is market slang referring to the temporary rise in an asset, like a stock, bond or some other asset of value, or the market as a whole, which continues just long enough to attract investment by naïve or unsuspecting buyers. The buyers are the suckers since they are likely to lose money on the trade when the price heads lower again. In most cases, the unsuspecting trader or investor that chooses to get long in the market at the wrong time is what's referred to as a “bag holder”. They are also part of the camp of people that don’t understand market direction or technical analysis. There is a dangerous lack of knowledge surrounding the “prevailing trend” as well. These participants essentially come into the market and take shit price action values off the hands of people that are selling based on legitimate concerns! This phenomenon is also known as a dead cat bounce, a bull trap, or a bear market rally. No matter what you want to call it, it’s a dangerous time to get long in the market…unless you have a timeline that is so far out it doesn't matter. Let's be honest, for short term traders, understanding the sentiment of the market is the MOST important part of the decision making process. That is one MAJOR piece of the equation that you can't screw up!
Sucker rallies frequently occur when the price of a stock noticeably rises despite the fact that the fundamental aspects of the stocks or the markets have not changed. In most cases, these fundamentally unsupported price increases result in a large drop, usually continuing an overall downward trend. If we look at where we’re at right now, there are a LOT of head winds that are making markets uncomfortable. There are larger Macro events that are bound to add weight to the investor community. There are credit cycle challenges at home that are going to put pressure on consumers (which will in turn have effects on future earnings if people stop spending as much). Point is, there are some big roadblocks we’re facing. Sidenote, I know there is another side to this conversation and that some people are going to disagree with that I’m writing but the truth is, and I think we can all agree on this point, there world is in a bit of a pickle…There is enough uncertainty out there that the markets might take a break from it’s long movement, wait to see what happens with the Ukraine, rates etc…and once the dust settles, the markets will then reassess.
Back to my principal point…Sucker rallies frequently occur amidst bear markets (we’re currently flirting with a technical correction -10% off the highs), where small price increases attract a few buyers but then the selling continues in large quantities. FACT: The volume that came in late last week was above average…with that said, the volume that has printed since early Jan has been geared towards the sell side. Simple fact!
Sucker rallies are easy to identify in hindsight, yet at the moment they are harder to see…unless you have a firm understanding of technical analysis. Which most people don't. As prices fall, more and more investors assume that the next rally will mean the end of the downtrend. Which is generally a miscalculated bet. Rallies are great, but not always significant. What I mean is if price rallies into a prior level and reverses back to the downside it’s more confirmation of what the general sentiment is…bearish! Eventually, the downtrend will end, but identifying which rally turns into an uptrend, and not a sucker rally, is not always easy….Again, unless you understand TA really well.