Understanding The Rally And The Next Stock Market Move

Stock markets continue to rejoice on hopes and dreams of a path through the European mess. Italian yields dropped sharply today after major austerity measures were pushed through. The SPDR S&P 500 ETF SPY  is trading at $126.80, +1.94 (+1.55%). In addition to optimism about Europe, economic data in the United States continues to be strong. Most amateur traders are looking to buy the market into the end of the year, expecting a Santa Clause rally to continue, but extreme caution must be used.

First, traders and investors alike must recognize that the Dow Jones Industrial Average is up approximately one-thousand points in the last week. Buying now is paying a premium on the market that is not needed. Second, remember this market is bipolar. One week the savior is born and the markets will never go down, while the next the world is doomed due to Europe and the crisis. Paying up for anything is a fools game as the pro traders take money from the weak minded.

Projections for 2012 are grim. While we may float and limp into the end of 2011, next year will be another rough one with a fair amount of downside and wild swings.

Looking at positives and negatives are always important. The positive for the rally today is easy to spot. The financial sector is rocking. Stocks like JPMorgan Chase & Co. JPM  are having a monster day. The banks are leaders in the market and their strength confirms that the rally will hold today. JPMorgan is trading at $33.83, +1.50 (+4.64%).

Commodities are weak today. Everything from oil to gold, silver and natural gas seem to be left out of the rally. This may be a signal dumb money is chasing the rally and jumping out of commodities. The SPDR Gold Trust (ETF) GLD  is trading at $168.44, -1.48 (-0.87%).

Again, the key as a trader is to avoid the emotional decision. Investors chasing the rally now are falling into emotion and that is why they always lose money. Stay patient and follow the charts. They will tell you the truth.

Gareth Soloway
InTheMoneyStocks.com