How high does this bear rally have to go to fool us into thinking it’s the real deal? You don’t have to be a technician to answer that question — just look at the chart. From a visual standpoint, a move up through the red line would surely get investors’ juices flowing. The reason is not just that the Dow would appear to be within shooting distance of the old record high, it would also have pushed past two important peaks created during December’s steep plunge.
Do we trust our lying eyes at that point? Not unless we want to get slaughtered with the rest of the bullish herd. For as convincing as the rally might seem, it could easily fail above 25,000 due to the bountiful supply that accumulated between 25,500 and 26,000 last year in the February to July period.
Mr. Market’s M.O.
Allow for the additional possibility that the bear rally could fail at any time — i.e., now — and the risk could be particularly high if the broad averages end Friday strongly on the upswing. The Dow looked unstoppable at Thursday’s close; if the binge were to continue for another day, it would leave bulls feeling giddy and bears nauseated. What a beautiful trap that would set! It would perfectly fit Mr. Market’s M.O., which unfailingly makes important tops all but unshortable.
To heighten the deception, Mr. Market would avoid ending Friday with stocks at their highs; otherwise, it would be tempting for bears to short into what they’d perceive as an unsustainable burst of exuberance. A measured correction off the peak of a powerful rally would leave them less eager to challenge the mood of the day. Conversely, the appearance of sustainability and moderation would fool bulls and bears alike into expecting Monday to bring more of the same.
Admittedly, this scenario will require a very specific sequence of events to set up a nasty surprise next week. It is just one permabear’s ruminations. But if things should play out more or less as envisioned, it will surely merit your caution.