Tuesday, December 13, 2011

Recent stock market rally is now on the disabled list

It is still not out of the question for the recent stock market rally to show some life going into the end of the year, but the way the market started with a nice gain and then fell apart to close with a moderate loss today is certainly disheartening. So, the recent rally is now officially on the disabled list, and only extraordinary effort will get it back on track.
That said, today was quite typical of the kind of activity one would expect to see when traders and short-term speculators are "testing" a significant rally. After a weak day on Monday, some traders and short-term speculators saw an opportunity to engineer a short squeeze at the open today. Yes, they succeeded, but a lot of people were wise to that move and sold into that early rally, erasing a lot of the early gain.
Today was also a Federal Reserve FOMC meeting day, which are notoriously volatile. It can take three or more trading sessions for the market to rediscover equilibrium after an FOMC meeting as traders and short-term speculators overreact to virtually every news item or economic indicator that crosses the wire, for at least a couple of days.
In short, today's market action doesn't tell us much at all about the durability of the recent rally, but it at least tells us that a Santa Claus rally is not an absolute slam dunk.
Traders and short-term speculators will continue to "test" the market in the coming days


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