Permabulls, stock market dip-buyers mount surprise Thursday rally
WASHINGTON – After a two-day bloodbath, primarily centered on overpriced and now tanking tech stocks, traders and investors on the long side finally got a break Thursday. All three major market averages currently trade above or near 1% gains on the day, with the tech-heavy NASDAQ up 0.80% as of the noon hour. What accounts for this surprise Thursday rally remains elusive. What isn’t elusive? The enthusiasm of permabulls and dip-buyers.
On the other hand, after the market’s horrendously depressing close on Wednesday, the McClellan Oscillator chart received its daily update. It showed what we’d hoped for and actually expected: A vicious, downside climax, as you can easily see on the right side of the Oscillator’s daily chart below.
The revenge of Wall Street’s permabulls and dip-buyers?
As we’ve noted numerous times in this column, extremes in either bullish or bearish activities picked up by this chart generally inspire some kind of dramatic reversal in direction within a short period of time following their occurrence. In this case, the Oscillator chart we use showed an extreme bullish move below the zero line of the X-axis. Its very extremity signaled that we’d likely enjoy an almost immediate and intense rally today.
Of course, such reactions from extreme overbought or extreme oversold numbers, as illustrated in the chart above, may occur as short term blips in either uptrends or downtrends. On the other hand, these extremes may also generate long lasting positive or negative reactions. Permabulls are always looking for positive reactions. And that’s what they’re enjoying today.
Adjusting our portfolios
Though we’re more or less permabulls ourselves, we’d sold off a few of our weaker positions Wednesday, some for gains and some for losses. We didn’t do a mass equity dump as we had no way of guessing how severely oversold the McClellan Oscillator might be until after the close. Though we expected that Wednesday’s selling panic would generate an extremely negative bias.
As always, our selling was partial and defensive, involving a few positions we didn’t really want to sell. But it was defensive in nature, leaving us with less to sell the next day should our educated guess prove not quite as educated as we thought.
Avoiding Wednesday’s dump-a-thon, at least in part, preserved the possibility for most of our portfolio to take advantage of today’s bounce back. That’s a great relief. And, as a result, we’ve nipped back into a couple positions we’d jettisoned Wednesday, notably Apple (NASDAQ:AAPL) and just a bit of still badly-damaged Microsoft (NASDAQ:MSFT).
If this is for real, should we join the block party the permabulls and dip-buyers just re-convened?
Maybe we already have. We also decided to begin, once again, a share by share accumulation in shares of Amazon.com (NASDAQ:AMZN). The S&P sector categorization of AMZN shares actually puts it on the retail (Consumer Discretionary) shelf. But the average investor considers these shares as tech shares, so it trades accordingly.
We sold our previous small position roughly a month ago for a nifty profit, near its most recent high, and we started accumulating AMZN shares again near Wednesday’s close. We buy these expensive shares (currently trading around $3,162 per share) just one share at a time, as we are not malefactors of great wealth.
Sadly, it’s tough for smaller investors to hold these shares for any period of time, because $25-$75 daily moves in these shares are far from uncommon, leading to irregular heart rhythms as well as the consumption of unhealthy amounts of Maalox. But we hold as many as we can, selling them when they seem to hit a peak. We then hope they sink once again so we can buy them again.
Note, however: The “wash sale” phenomenon
Trading in and out of a given stock over a 30-day period means that if you lose money, you get tagged for a “wash sale.” Which means that you can’t take your short term loss to offset the current year’s profits when you file your annual income tax return. That’s enough to deter even eager permabulls, day-traders and habitual dip-buyers from indulging in this tactic.
The one way out of this trading dilemma happens to be the one we take. We only trade AMZN shares in a traditional IRA rollover account. Here, you can’t (currently) incur a “wash sale” hit if you take a loss. That’s because, win or lose, you only get taxed on the amount of your mandatory annual required minimum distribution (RMD).
Capital gains and losses, while they happen in these accounts, don’t matter in this case. It’s only the cash you must withdraw each year that counts, this time as ordinary income. (Unless you have a Roth, the funding of which has already been taxed.)
BTW, as of the most recent adjustments in IRA rules, save for emergency distributions, the new age at which IRA holders must begin their RMDs was increased to 72 from the earlier requirement of 70 ½. But check with your accountant to see how this works for you, as other little rules also apply.
Messing this up can cause a rather unpleasant tax penalty. And you can be sure the current administration will keep hiring new IRS auditors to enforce all tax provisions as strenuously as that agency did during the taxpayer-hostile Obama Administration. You have been warned.
Moving right along, how about that East Coast fuel pipeline disaster?
Meanwhile, Mr Market rolls on. As we finish today’s article, near 1 p.m. ET, both stocks and major averages have backed off from Wednesday’s early morning highs. But they continue to hold relatively close to those highs. It may prove interesting to see how many sellers and short-sellers emerge near today’s 4 p.m. ET close. That could give us some idea as to whether today’s impressive snapback rally has any staying power.
So, too, could the nasty East Coast fuel pipeline extortion tie-up. We hear whispers that the fuel may start flowing freely again to all sectors fairly soon. Even so, it could take another week or more for the shortages and gas lines to diminish.
(UPDATE: ZeroHedge weighed in with a fantastic story that makes the entire East Coast fuel shortage look like a massive exercise in gaslighting. The very thought undercut the price of many oil and gas-related stocks late Thursday afternoon. True or not, this interesting twist is well worth reading.)
(UPDATE 2: Those intrepid permabulls and dip-buyers retained control of US markets right up to Thursday’s closing bell. We’ll see if they can follow through tomorrow.)
Now, East Coast telephone lines are down?
Meanwhile, we continue to experience a huge break in traditional telephone as well as cellphone service throughout this country’s mid-Atlantic and New England coastal megapolis in the Verizon system. (Some Midwest glitches as well.) What the hell is going on with this country’s utility system security? We’ll do some digging to see what we can learn.
Rest assured, however. These breakdowns do not inspire confidence in the Biden Junta’s ability to run this complex and badly divided country. They may have, in part, been a big impetus behind this week’s massive market selloff.
Not to worry, though. Cheerfully paying higher middle class taxes should help solve all these problems in a trice.
Have a good afternoon.
— Headline image: Cartoon by Garrison. Reproduced with permission and by arrangement with Grrrgraphics.com. Size modified to fit CDN format.