Is This Stock Market Rally Believable?

The KISS Rally (and some other favorite aphorisms)

Keep It Simple, Stupid!   I admit I am far too guilty of trying to rationalize what my eyes are seeing as the market seems to defy gravity and continues to move higher. After taking a "pause" last week and pulling back, it appears that strength has returned as the bulls outnumbered the bears to start the week. So what gives?

The short answer is-damned if I know. I usually laugh when I see some respected pundit or the CNBC zoo-crew provide a reason for market movement (almost always after the fact) as the answer is usually never as complicated as they make it out to be. In my younger days, I used to love to reply that, "there are more buyers than sellers" when asked why the market was moving higher. What is it about human nature that requires a need to know everything about everything? 

It's almost as if people view the markets as some sort of clandestine enterprise whose secrets are shared by a privileged few.   Let me reveal the secret-that's not it at all! 

What the markets are is a series of micro-elections (buy or sell) that occur in a certain timeframe that reveal the collective will of the participants. The prevailing will determines whether the market is up or down regardless of a participant's reasons for holding any such view. Let's take a look at the charts of both the S&P 500 ETF (SPY) and the Nasdaq 100 ETF (QQQQ) to see what I mean. 

As we can see from the charts, the bottom was formed on March 9^th and there has been a pretty nice move up.   The market is always forward-looking but to me, the fundamentals just don't add up (yet). Well what changed in the economy to cause this rally to happen? 

Then I thought back to some of the popular catch phrases that I learned as a youth in the business and it all started to make sense. Let's examine a few:

1.      Don't fight the Fed!  We have seen so far that the Fed and this administration is going to do just about anything (whether it makes financial sense or not) to back-stop the economy. The printing press has been opened and the money is flowing. So get out of the way! It looks like the shorts in the market have realized this and have helped contribute to the rally.

2.      The market can stay irrational longer than you can stay solvent! This is a continuation of the first point but a lot of traders have problems with this one. The need to be "right" sometimes outweighs the consequence of being wrong.

3.      The trend is your friend! As we can see, since the V bottom was formed, the indices have made a series of higher highs and lower lows, supported nicely by the 20 day moving averages (SMA).

4.      Bulls make money, bears make money, and pigs get slaughtered! It is important to be aware that when a sustained move takes place based on no fundamentals, it is important to have a good risk management strategy in place and know where to pull the rip-cord on the downside.

5.      Lastly, K.I.S.S- Keep it simple, stupid! Don't try to out-think the market. Take what it gives you. Trying to find the exact reason why something is happening is a fool's folly. Find a low-risk entry, employ money management techniques, and enjoy the ride!

As we can see, sometimes when trading the markets it is better to take a simple approach than a complex one. By "dumbing down" your approach, you could find yourself in profitable trades that you didn't even know where out there.