Another Strong Rally Could Quickly Materialize

Sure, the broad market is overbought after September’s furious rally pushed stocks to new all-time highs.

But there’s more at play this week than a regularly-scheduled market cool down…

“The week after September options expiration has consistently been one of the worst of the year,” reports Christopher Mistal at Stock Trader’s Almanac. “Since 1988, weekly declines average from –0.93% for NASDAQ to –1.49% for Russell 2000 and S&P 500 has only posted gains five times in 25 years.”

There’s nothing to like about those odds.

A quick review:

Equity funds last week clocked their largest inflows since 2005. A no-taper “surprise” from the Fed helps jolt stocks to new highs. The market’s overbought—and we’re about to enter what has historically been a crappy week for stocks.

Seems about right.

The herd is piled onto the bandwagon. It’s time for some reckless driving to knock some of the newcomers off the ride. If only they had a time machine to help with their trading decisions…

“In hindsight, no birthdays or anniversaries are ever forgotten. In hindsight, eating sushi from the 7-11 around the corner from the office was a bad idea. And in hindsight, we’re all trading geniuses,” quips my trading buddy Jonas Elmerraji. “But the problem with hindsight is that it’s easy to forget about it – especially when it comes to the stock market. It’s way too easy to say, ‘Sure, I would have done it that way anyway’. And after the conspicuous bounce in the S&P 500 since the start of September, that’s exactly what we’re seeing in the financial media.”

In hindsight, investors shouldn’t have been so bearish heading into September. They shouldn’t have ignored the picture-perfect broad market bounce off support. And they certainly shouldn’t be diving headfirst into equities now after a breakneck rally that lifted stocks more than 5% in just a few weeks…

I told you late last week you had your opportunity to book some profits and prep for new trading opportunities. Steer clear of the hindsight traders and wait out the post-Fed hangover. The fourth quarter is just in front of us. After the overbought pressure is released, another strong rally could quickly materialize…