Halloween Market Rally – is it a Trick, or a Treat?

My update on October 16, 2014 covered what I learned in studying the bear market moves of the past 40 years.  You may recall, I said that the average initial drop from the market high was 10.3%.  The recent correction had the market dropping 9.8%.   I also stated that the correction we were then in should be almost over based on the patterns of the past bear market moves, and we could have what is called a “dead cat bounce”, rallying back to re-gain at least 78% of that drop.  As of today, the stock market has regained 88% of the September/mid-October drop, so it has gained a little more strongly than the norm.   Was this a trick, and this rally was just a “dead cat bounce”?  Or, was this a treat, and we are headed for 18,000 on the DOW by year end?  Can the market go higher without the Federal Reserve’s involvement via its Quantitative Easing Program, which concluded this week?

The answers to these questions should come in the next two weeks.  The key to the answer is market volatility.  If this past correction was normal, the stock market should move in small amounts – up and down – for the remainder of the year.  We would reach 18,000 on the DOW by the end of the year or early January.  Any correction we have over the next two months would be mild.  Under this scenario, my next update will be in December.

Also, on October 16th, I stated that if this was just a dead cat bounce, it would last two to three weeks.  The rally will have lasted three weeks the day after the November election.  So, we should know if we are back to normal markets right after the election.  Again, the key is volatility.  If the stock market has down days of 200 or more points on the DOW, I will release an update as to what this scenario means.

For now, one must continue to be bullish on stocks unless the market returns to volatility.  We should know the answer to which scenario is playing out within the next two weeks.

Grady

Postscript: Since writing the above, the BOJ (Bank of Japan) announced a new stimulus program; this favors the DOW getting to 18,000 by the end of the year.  We should not have much volatility; the rallies should start to slow down, and we should slowly move higher through the end of the year.