Wednesday, November 30, 2011

The stock market rally continues

It was quite impressive to see the early stock market gains hold up through the day and then even see a further gain right into the close, with the Dow Industrials now back above the psychological 12,000 level. I still believe that much of the early gains were due to short covering, but the durability of the rally suggests that indeed a majority of market participants have now adopted a "risk on" bias. This is indeed what one would expect to see in a trading range after a significant decline had left the market in an "oversold" position and the bias reverses. I suspect that this time the rally on the bias reversal was probably more extreme since there were probably a lot more short positions out there due to the seriousness of the concerns about both the uncertainty of the U.S. economic outlook for next year and the European debt situation. The rally also got a boost from some decent economic news.
All of that said, how long this rally continues is a big open question due to ongoing uncertainties. The first main checkpoint will be the close of the week on Friday as well as how much of the gains remain after the close on Monday. That will tell us a bit more about the depth of this rally. Maybe it will continue through the end of the year or into January, but unless the economic outlook for next year brightens considerably we will likely be stuck in a trading range, with the 12,250, 12,500, and the 12,750 levels of the Dow providing "convenient" turning points for traders and short-term speculators looking for excuses for "taking profits" and bouncing around the trading range for another lap.


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