Two roads diverged in a wood, and I,
I took the one less traveled by,
And that has made all the difference. – Robert Frost, 1915
Robert Frost may have been the greatest contrarian trader, no?
Our post of August 22nd, S&P500 Faces a Fork in the Road, noted the S&P500 faced a fork in the road. One path, the 2010 bullish trajectory bolstered by Jackson Hole; the other, the bearish 2008 trajectory, the result of, say, a European sovereign induced banking crisis.
From the post to yesterday’s close, the S&P500 was up almost 8.5 percent generating its “best eight-day gain since 2009.“ Not a lot of fundamental news to explain the rally so let’s just call it for what it is/was, a Robert Frost rally.
The road not taken, less crowded, and most shorted was the path of least resistance in a quiet market with very little macro headlines. We noted hedge funds, some with almost no tolerance for short-term pain, had opened their biggest net short positions in the S&P500 since early 2008. Hence the rally.
Where to now? We’re not certain, but Bespoke does note September is the cruelest month for stocks, the S&P500 is having trouble at 1230, which is right at the 50 percent retracement of the recent crash, and the Europeans will be returning from their holiday at Swan Lake.
Even given our uncertainty where equities are headed, we note most global stock indices have attempted to put in W bottoms and it therefore essential the August 9th 1101 low on the S&P500 holds. Our sense, however, volatility is about to pick up in the next two months. Our best guess is the S&P500 and other equity indices will enter an expanding triangle pattern (see chart below) in September and October before deciding how to close the year. Best to buckle up. But, hey, what do we know?
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