The market has bounced nicely the past two days after the Brexit selloff. Now, here’s the biggest question on traders’ minds: Is this just a normal oversold bounce before the market heads lower? Or was the Brexit selloff just an overreaction and a non-event before we go higher?
Of course, no one knows the answer to this question, but there is one thing which continues to favor the Bulls: During every selloff over the past few years, there is an INSANE (I repeat INSANE) rush to buy protection. By protection, I am referring to index puts, equity puts, short positions, inverse ETFs, Volatility ETFs, etc. It seems like the financial crisis of 2008 is still VERY FRESH in people’s minds and no one wants it to happen to them again.
Why this favors the bulls is that the market tends to fool the majority. In other words, corrections rarely occur when people are fully hedged and properly prepared for one. Therefore, when fear spikes and sentiment indicators surge to extreme bearish levels, the market tends to move in the opposite direction.
I am by no means saying we are out of the woods yet. As I mentioned in my last blog post, I reduced exposure for my clients last week, but I am doing my best to stay in the strongest stocks that were mostly unaffected by this recent decline. My main reason for leaning towards the bullish side is liquidity. It is foolish to fight the globally coordinated effort by Central Banks to keep interest rates low. As I have said many times, of course the market will go down, experience pullbacks, and have corrections; however, the market doesn’t seem to want to STAY DOWN, mostly due to the liquidity and this consistent “one foot out the door” mentality.
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