In the past few weeks, the market appears to be setting up for its strongest rally yet. While bears are not wrong in thinking the market is way overextended, nothing dictates that it has to stop. On the other hand, no we are not headed for the moon. But the market is going to keep reaching new highs until all the bears become bulls. Since 5000 is the most obvious expectation, I think it goes past there. Somewhere under 5500 but over 5000. I'm not looking to make predictions, just a general expectation. The setup in the past few weeks looks like the beginning of a larger rally than we saw last summer, which culminated in a sharp and swift reversal at the beginning of September. Inflation continues to surge, strikes, labor shortages, chip shortages, supply bottlenecks, and a relentless pandemic that continues to stick around every time we think it's going away. Add to that the polarizing socio-political ideologies that are setting the stage for a breaking point in the (not-so) United States. Evergrande default is still just one missed payment away, they keep making the payments at the very last second, which numb the pain but don't solve the larger problem. Our Elected officials both Republican and Democrat, have failed to show they are capable of any real compromise regarding the budget, as that problem was also covered with a bandaid by temporarily funding the government until December 15th. This ties into the difference in belief/ideology topic but has its own specific consequences if they fail to agree upon a budget before defaulting. And, here's the big one, a climate crisis that has dire, inevitable global consequences...but history reminds us we probably won't do anything about it until some real eye-opening damage occurs. Considering all these triggers, I would expect the biggest players in the market are aware and have been aware of this and continue to look to squeeze every gain they possibly can out of the market, before we see a great depression like drop.
So, I am bullish in the short term, expect this rally to exceed the $5000 mark as this will really force any bear left standing to join the bullish empire. The euphoria is reaching its maximum level, a sharp, stronger rally is most probable before a serious correction or crash occurs. Oh and the Hindenburg Omen triggered this week, which has preceded every market crash since 1985. But doesn't that also send a lot of false signals? Yes, false crash signals. But it is extremely reliable if used as a correction indicator.
According to Kirkpatrick, Dahlquist's "Technical Analysis", "Twenty-five confirmed omens have occurred, with only two failing to be followed by a decline of 2% or more. The other subsequent declines were not crashes because the omen often gives false signals for crashes. However, the odds of a crash (down more than 15%) are about 24% after a confirmed signal. One major problem with the derivation of this indicator is that it is so complex...complexity usually comes from curve fitting and is, thus, potentially unreliable. The Hindenburg Omen, however, is based on technical logic and is certainly something to follow" (170). When used as a leading corrective indicator, the Hindenburg Omen has proven it's reliablity, 23/25. (This is a bit outdated as the Third Edition was published 2016, but the Hindenburg Omen triggered correctly for 3 significant corrections since 2016, as well as the March 2020 crash, while only producing 3 false correction signals. Thus, an updated 26/31 is still reliable enough to heed the caution it indicates.)
Familiar with the seasonality, etc, but I wonder why the market should reach the expectation of 5000 first before a potential pullback? Having in mind a significant pullback is in the cards, why would anyone risk to receive 3.0%-3.5% return. By the way, as I understand, the most bullish target for year-end is 4800-4850.
njscipione
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From a rational perspective, I agree. But with how rapidly the indices, equities, commodities, etc. have increased since March, it’s not sustainable for prices to I’ve so sharply upwards. If prices were expected to decreases significantly before a new bullish trend begins, with all these panic triggers that could cause a crash, prices can continue to inflate as banks, investment funds, hedge funds, are going to want to take as much profit from the top. I would imagine the sharp rally being massive short covering, retail buying rally as all these bigger players reduce their risk, maximize their profit. On top of that it’s a very speculative time of year, as earnings are pretty much out of the way until 2022. So without a panic trigger, I don’t think it’s a rational rally. It’s a high risk, high reward but also a terribly rude awakening for the traders that only think the market goes up
...and the next 30-60 days are optimal for market correction. Everyone is complacent, counting on seasonality, so on...the event should not be expected unlike October when everyone had bought insurance against a significant pullback that never happened.