Investors Should be Suspicious of False Hope

Take a look at the chart below and you cant help but wonder if this bounce is
doomed to fail like the previous four September/October fake-out rallies. Since
the Aug. 9 lows, the S&P 500, along with the Dow and Nasdaq, has staged four
seemingly powerful rallies. Each time, the S&P 500 gained about 100 points. Each
time, the S&P 500 erased all or nearly all the gains and ultimately fell to new
lows. Just last week, stocks rallied on Monday and Tuesday (Sept. 26 and 27).
The media got all giddy, and after Mondays (Sept. 26) close, the Associated
Press claimed that Stocks jump on hopes for a Europe fix. On Tuesday (Sept. 27),
Reuters reported that Stocks pop on Europe hope. The S&P tumbled 120 points from
Reuters hope-filled Tuesday headline to this weeks lows. Yesterday, once again,
the AP exclaimed that Stocks rise on hopes for European banks. Is this bounce
just another fake? Hopium Doesnt Work Hope is not an investment strategy, and
those smoking hopium a week ago were in for a big bad Greek surprise. Sundays
(Sept. 25) ETF Profit Strategy update clearly stated that Following this bounce
we are expecting a new low and will re-enter short positions against 1,148,
1,173 or after a break below 1,121. It is prudent to scale out of short
positions between 1,100 1,088. Fake vs. Real Low The chart above shows why the
Aug. 9 low at S&P 1,102 was unlikely to be the real low sentiment was simply
too bullish. The Aug. 14 ETF Profit Strategy update stated that When the dumb
money feels now is a buying opportunity, we should be suspicious. In fact purely
based on sentiment, we should probably expect a reversal to the downside. Real
bottoms occur when investors are deeply bearish, not bullish. As the chart
shows, investors were much more bearish at this weeks low.