I'm already hearing targets for where the rally is going to top out. I guess it's not surprising given the incredible beating investors have taken over the last 3 months. We are understandably gun shy. I doubt anybody thinks this market can rally more than another 50 to 75 points before the bear takes over again.
Let me just remind everyone that all markets regress to the mean. There are no exceptions. Sometimes it may take a while but they all do it.
Now I want to revisit a trade that some of us put on back in Oct. That would be the 20 under the 200 trade. Usually bear markets aren't able to stretch much more than 20% below the 200 DMA before snapping back at least close to the mean. We witnessed extraordinary times this fall. Markets got more depressed than just about any other time in history. We saw breadth extremes that have never been matched in history. At the bottom the S&P was 40% below the 200 DMA.
I think the regression to the mean is now underway. However the market is still 24% below the 200 DMA even after today's rally. So by any historical standard this is still a market that is extremely depressed. I still think we have a good chance of moving back up to the 200 DMA before this rally finally rolls over.
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