The markets opened strongly this morning and just kept on climbing the mountain all day. SPX closed at $1865, for a gain of $35, and RUT rose $18 to close at $972. A strong measure of the strength of a rally is the lack of profit taking. SPX just continued higher, closing precisely at its high for the day. That suggest that traders are expecting this rally to continue next week. Yesterday's markets were encouraged by comments from one of the OPEC countries appearing to be open to reducing oil production. That comment wasn't really relevant since it didn't come from the Saudis, but it caused oil to trade up yesterday and that trend continued today.
Let's consider that for a moment. We have been told that declining oil prices suggest weak industrial demand so stock prices should sell off. But when someone suggests that OPEC may cut oil production and therefore lower oil supplies, the stock market trades higher? An abundance of oil supplies has nothing to do with reduced industrial production. This point and several others illustrate how emotional and irrational this market has become. I was watching an interview this afternoon and when the interviewee assigned a low probability of an upcoming recession in the U.S., the talking head spoke over him and began to excitedly chatter on about the weak fourth quarter GDP number and so on. She seems to have forgotten that a recession is defined as two successive quarters of negative GDP growth. We have yet to have the first one. Sensationalism has invaded the financial media. Fear sells.
Retail sales increased modestly in January, up 0.2% and the University of Michigan consumer sentiment survey reported 90.7 for February, down from 92.0.
I would argue that we are seeing many signs on the charts of this market finding support. But the lack of rationality about the connection of oil prices to the U.S. stock market, and the excessively pessimistic financial press worry me. One could make a contrarian argument here for the bounce, but it seems as though the shrill cries from the "sky is falling" crowd are drowning out a rational discussion. Markets may easily go to extremes and stay there longer than expected; it is simply human nature.
I closed the remaining put spreads in my February SPX iron condor this afternoon. I can easily make the case for the bottom being behind us and this bounce continuing next week, but the excessive irrationality and wild swings back and forth worry me. So I closed Feb for a loss. We have already closed the January position for a nice gain; assuming our March position does well, we should be back to break-even shortly.
The markets will be closed Monday. Enjoy your long weekend.