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Don't Let an Early Rally Fool You

The bigger trend is down and seasonal factors are now decidedly bearish.

I will let you in on a secret; if you buy the market in the last half hour of the last trading day of the month, you can most always close that trade the morning of the first day of the month for a profit. This works because there is a natural inflow from 401(k) plans, IRAs etc. Mutual funds then take these new funds and go out and buy stocks.

Stocks are set to open sharply higher this Wednesday morning, and I am sure there will be many who attribute the gains early today to some data point, or overwhelming bearish sentiment or the market simply being ripe for a rally. That is fine. This is a big market and there is room for a great many opinions as to why stocks rally and decline, on a daily basis. Still, do not lose sight that the odds are stacked in favor of buyers, on the first day of each month.

More important still, do not lose sight of the fact that the trend is definitely lower and has been April. Oh, there is one other thing that you should not forget as stocks rally sharply in the early part of trade today, September is traditionally the worst month of the year to own stocks. The month of September has posted an average decline of 1.3% since 1929, and it is the only month of the year to decline more than 50% of the time.

Early in the week, I suggested that the odds were good the market would rally into the early part of September, possibly reaching SPX 1084. That is an important technical point where I fully expected that the bearish trend would resume. Being silly (and a bit reckless), I added two new call positions, despite my overall bearish view. All things being equal, I will exit those positions into the rally today.

The bigger trend is down and seasonal factors are now decidedly bearish. Like the first of the month rally, these things are time tested. Resist the urge to chase strength. Get ready to move aggressively short in the near term, as the next really big move is likely to be lower. We did not get filled on our closing orders from yesterday since there was no rally to fill. I am reiterating that recommendation today.

Trades: Sell to close TNA September 35 calls at $3.60 and sell to close UNP September 75 calls at $1.30.

At the time of publication, Terry Bedford was long UNP calls and TNA calls.

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