We’re now in the middle of the seventh relief rally of the year…

That’s a lot of rallies… with no real relief.

After dropping 12% from its recent Memorial Day peak (the apex of its previous relief rally), the market has been on a tear, rising 6.5% since June 16. 

And with each bear market rally that fails, skepticism grows about the next one.

But this recent rally may have the best chance of them all – or at least last longer than the previous six – because of some good old-fashioned trade location.

The Importance of Trade Location

Good trade location is what happens when you “buy low and sell high.”

Obviously, it’s easier said than done and is the most simplistic of Wall Street cliches.

That’s because in hindsight, it seems like a no-brainer.

The problem has more to do with the emotional side of investing than anything fundamental.

You see, when everyone is fearful it’s hard to buy low. That’s because it always seems prices can drop even lower.

And it’s hard to sell high when everyone seems to have lost their minds during the bubble-induced melt-ups like we saw in 2021.

But those opportunities, although emotionally difficult, are usually the best.

And paying very close attention to the collective market’s trade location is something even fundamental, long-term oriented investors need to pay attention to.

That’s why on June 10, I called the previous relief rally into question. I wrote…

Here’s what concerns me now… When you combine all the recent price action since the lows, the volume profile shows investors chased this rally near the highs around 4125.

In the chart below, you can see how all that volume accumulated around this area… The buyers already bought, just at the wrong price.

Here’s that chart again…

Buying the rally at the highs is an example of the market collectively having poor trade location.

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A Change of Scene

But the current relief rally has the opposite dynamic at play.

Investors gained excellent trade location this time around by buying low.

And some brave souls actually bought the bottom.

Take a look at the volume profile for the S&P 500 futures from the start of this current rally…

It shows the S&P 500’s volume profile in green overlaid on its intraday price chart…

This time, most investors bought around the 3775 area. But even more astute ones bought lower at 3675.

This is the reverse of the failed rally leading into Memorial Day, where most people chased the highs at 4125.

When most people buy into a rally at the highs, they’re more prone to let go at the worst possible time. And events that seem like gamechangers, are usually the ones that trigger stop losses.

That’s why in that same essay, I wrote…

With the Volatility Index (VIX) still above 25, a Fed meeting next Wednesday, and a big quad witching futures and options expiry next Friday… prices are guaranteed to fluctuate heavily. That means stop losses are likely to get triggered at the wrong time.

And that’s exactly what happened.

But all these events are behind us now, with new buy-ins well positioned 3-6% below current levels.

With new money coming into the market at the right price and at the right time, they’ll be prone to hold on and fight through any random negative reaction from economic events or headlines.

Which is why I’m angling to buy dips until the market regains its 50-day average price around 4025, with a stop below 3775…

The upcoming earnings season kickoff on June 14 will have a lot to say about which level gets hit first.

Regards,

Eric Shamilov
Analyst, Market Minute

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