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Who Are the Suckers?

On the face of it there was nothing extraordinary about various market experts expressing bearish opinions on the market.
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The August cover story of Modern Trader magazine was titled: "10 reasons to sell stocks now."

On the face of it there was nothing extraordinary about various market experts expressing bearish opinions on the market. Last year we raised the subject of an impending market top in our October issue and there are numerous market technicians who have been sounding the warning bell for years, drawing chilling comparisons to past market tops.

While there was validity to these technicians' warnings, there are permanent market bears just as there are permanent market bulls. Many of these technicians highlight points in time that align with certain market reversals. Not every occasion that these points in time align results in a major top or bottom, but major tops and bottoms do tend to occur when they align.

What was different with this story was that it did not simply come from the usual suspects but from a wide array of market participants citing various fundamental as well as technical reasons for their concern.

For our part, we just pointed out the truly unique situation the market has been in since the 2008 credit crisis. The U.S. stock market has experienced its greatest bull market of all time by various measures, but no one would mistake the U.S. economy over this period as one of robust growth.

The prevailing wisdom is that with six years of a zero-interest-rate-policy (ZIRP), risk assets had no other place to go except for the U.S. stock market.

All of this is in a way of leading up to today and the question raised in our headline. Equity indexes experienced two large down days at the end of last week due to weakness in the Chinese stock market and perhaps various technical and geopolitical factors. Market followers were poised for the Asian open Sunday night and when those markets, China in particular, continued to slide, U.S. equity markets tanked during the less liquid night session. The S&P 500 was down more than 100 points on its normal open and the Dow Jones Index was down more than 1,000 points.

Many bearish analysts have touted this as a long awaited crash, and perhaps they are right. But the market began to recover shortly after the regular trading session began.

Is this simply a long awaited correction that allowed some brave souls a great buying opportunity because overnight panic selling pushed the markets further than it should have gone? Or was the 100-point plus intraday recovery from today's low another opportunity for sellers? DoubleLine's Jeffrey Gundlach thinks so.

Jeff Greenblatt, who quite presciently pointed out the possibility of a rare August crash two weeks ago, seems to think that the last few days may be a prelude to a greater move. Yesterday he wrote: "Here's the bad news, it's not even September yet. There's a lot of news coming due in September and not a single event I can see is good."

Markets appear to be speeding up all the time. In recent years, every time a long-awaiting correction appears to happen, the market reverses and makes new highs. Even with last October's (disputed) 10% correction, the market rebounded swiftly and made new all-time highs by Halloween; that same month.

Buyers always appear ready to step in looking for an opportunity. What makes this time a little different is that the market was showing signs of fatigue. The S&P 500 made its all-time high on May 19, and on several occasions failed to make a new high after rebounding from short-term sell-offs. Also, the Chinese problems are serious and not going away.

So, the question remains: Who are the suckers?

I don't know. While some savvy investors realized the overnight move was overdone and stepped in to buy near the lows--which created a huge rebound--if they were smart they took their profits today (this is not a recommendation, but if you make a month's profit in one day, take it).

Yesterday's move was the kind that scares people away from the market. The S&P 500 closed roughly 62 points higher than its low but also 57 points lower than its intraday rebound high. Last October the market quickly recovered, closing positive on the month.

Can the market do that again?

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