Momentum is driving the stock market bounce higher in the short-term, but markets still have a way to climb before they regain their record February highs.

Back on March 19, I predicted the start of the stock market bounce three business days before it happened. March 24 saw the market’s biggest up day in history with the Dow rising 2,117.72 points.

I laid out two scenarios which saw the S&P 500 climb to 2,900 by mid-April and even 3,200 by early May. Sure enough, the market spent most of April and May trying to make a decisive move past 2,900.

Momentum is now carrying the stock market higher — and betting against it has been a fool’s errand.

Stocks are up about 37% since the bottom in late March.

There’s a good chance momentum will push the market higher into mid-July when companies begin reporting second-quarter earnings. This will give us an idea of how heavily Q1 reports were manipulated. We may see that companies hid just how bad March really was.

This week, markets continued to inch higher even in the face of race riots following the death of George Floyd in Minnesota. I’m visiting my hometown of Charleston, S.C., to help attend to a mother battling breast cancer. On Monday, I walked down historic King Street — which is currently undergoing over $1 billion in development — to see stores boarded up and the city shut down again, just days after reopening from the coronavirus pandemic.

Ultimately, the market doesn’t care, which is a sign stocks will continue climbing until they reason not to.

However, now is the wrong time to stay complacent and bet all your eggs on an ever-rising market.

A Warning Sign in the VIX?

After reaching a high of 82.69 on March 16, the VIX, or Volatility Index, has fallen 67%.

It is however still double its February lows and appears to be finding key support. Year to date, the VIX is up 120%.

Website CrystalBull also shows the Relative Strength Index, or RSI, is approaching overbought levels. However, they haven’t surpassed them, even with stocks up 37% in just over two months.

This is why I think we can expect stocks to move higher for another month. That will push us closer to the election, which could influence markets, but I doubt it. The election will likely play a limited role this year since Wall Street seems to have at least a semi-favorable view of presumptive Democratic nominee Joe Biden, and a favorable view of incumbent Donald Trump.

Stock Market Bounce: Here’s What I’m Doing With My Money

Over 10% of my personal portfolio is currently hedged with triple-weighted inverse S&P 500 and VIX ETFs. I am trying to avoid staying in any positions for more than a few days.

For instance, I bought and sold Tesla Inc. (Nasdaq: TSLA) put options yesterday morning and captured a 65% gain in an hour and a half before the stock continued higher. It is looking to reclaim February highs so sitting in the position any longer made little sense. I also purchased Square Inc. (NYSE: SQ) call options that are up 19% in just under three hours at the time of this writing (Tuesday afternoon). Square hit 52-week highs Monday and demand for mobile payments seems to be rising.

The momentum will likely carry this stock higher.

I have sold roughly half of my stocks on the way up and will look to reenter after another crash finds a floor and a second bounce begins.

The tide could shift any day, but in my view the current bounce will continue for another month until companies begin reporting Q2 earnings. By then, RSI will likely have surpassed overbought levels, the VIX will have sustained its stable floor (which often happens before it spikes), and the S&P 500 will likely have breached 3,200.

I believe we are still in a bear market and that selling will continue. Just not yet.

For now, I can make no projections past the middle of next month. During periods of heightened volatility, it is important to stay nimble. Keep your powder dry. I believe there will be much better buying opportunities in the months ahead.

As the 30% selloff in March showed, it is important to keep a very short horizon right now.

Chris Cimorelli
Analyst, Money & Markets