Investors Should be Suspicious of False Hope

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tdp2664 InvestorPlace Take a look at the chart below and you can’t 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 Monday’s (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 week’s lows. Yesterday, once again, the AP exclaimed that “Stocks rise on hopes for European banks.” Is this bounce just another fake? Hopium Doesn’t Work Hope is not an investment strategy, and those “smoking hopium” a week ago were in for a big bad Greek surprise. Sunday’s (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 week’s low.