Thursday, August 20, 2009
The stock market today is like a 7-year-old child on a sugar high. Just when you think it's time to put the kid to bed, the chocolate bar he sneaked out of the candy jar has him bouncing off the walls.
You know he woke up early, ran around all day, and was showing signs of exhaustion just a few moments ago... but you don't know yet what is keeping him going. Is there ever a more frustrating time for a parent?
So it is with the stock market...
Stocks woke up early in March. They ran around the playground and played on the jungle gym for nearly five months. Last Monday, after a nearly 200-point decline, it was bedtime. The market's eyes were closing and it looked like it was "nighty-night" time for stocks.
Then, the chocolate kicked in.
Over the past two days, stocks have regained nearly all of Monday's losses and they're ready to head out to the playground again. But, as every parent knows, jungle gyms at midnight are a bad idea. The kid needs to sleep.
Every technical analyst knows stocks are overbought. We know it's nighty-night time for the market. But stocks keep jumping on the bed. We can yell and scream about how late it is and how you need to go to sleep or risk stunting your growth. But the 7-year-old child only cares about the thrill of the moment.
Parents though, like experienced market traders, know that sleep eventually comes.
It's midnight for the stock market. You can bet stocks are ready to fall asleep or you can bet they'll have the energy to party until dawn. One bet is based on logic and common sense, and one bet is based on the endurance of a sugar-high.
A healthy market needs its sleep. It needs to rest in order to store energy for the next growth spurt.
What we have today is an unhealthy market. It's a belligerent 7-year-old child on a sugar rush. And it's going to crash and sleep until noon at some point.
As a parent of a 7-year-old child, I'm confident fading the sugar rush is a good move.
Do not buy into this market. It's the equivalent of giving a child a sugar cube at bedtime. Yes, it'll probably bounce a bit higher. But eventually, it'll crash and burn.
Best regards and good trading,
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