So much for my "this is nothing more than a Fed-driven, dead-cat bounce" theory. I wasn't surprised to see a surge on Wednesday; the planets were lining up for a big surge then. To see such follow-through today though? There's no denying it's impressive. Heck, we could almost call it the beginning of another bullish leg.... but just almost. I'll show you the couple of things still concerning me about Wednesday's and Thursday's gains in a second. The first thing I want to do is give credit where it's due. Nice Call We couldn't mention this in Tuesday's newsletter, mostly because it wouldn't be fair to the paying members of the Elite Opportunity service. But, with the move so far into its trade-worthy life now, there's no harm in telling you John Monroe saw this bounce coming a mile away. EO members who acted on his advice from Tuesday afternoon's newsletter should be up more than 10% in the meantime. How'd he make so much money so fast? By jumping into the Direxion Large Cap Bull 3X Shares ETF (SPXL) at the exact right time. The Direxion Large Cap Bull 3X Shares ETF moves in the same direction as the S&P 500. It just does it three times as much, meaning for every 1% the S&P 500 advances, SPXL moves higher 3%. The S&P 500 has gained about 3.4% over the past two days, meaning SPXL has gained a little more than 10% for that period. Not bad for two days of work, huh? Now (and some of you know this from experience), leveraged ETFs are not for the faint of heart. They look like easy money, and they are as long as you're right about your directional calls. They're brutally unforgiving when you're wrong though. That's my indirect way of saying what I'm just going to directly say to you now... you may want to enlist the help of a professional trader like John Monroe if you've been bitten by the leveraged ETF bug. It's amazing how three or four really good leveraged ETF trades every year can really spice up your portfolio's performance. Thing is, the Elite Opportunity team is serving up ETF trading ideas a whole lot more often than three or four times per year. Yes, the Elite Opportunity service is a premium service. I'm telling you though, you get what you pay for. Along those lines though, just think how many EO members just paid for an entire year's subscription with just that one trade on SPXL. All the other winning trades for those folks are basically free. It's your call, but I'm telling you, I've never seen any newsletter as right as often as the Elite Opportunity service is. Indeed, John was spot-on with his call Tuesday. It's uncanny. Bottom line: Whether you celebrate Kwanza, Christmas, Hanukah, Festivus (for the rest-of-us), or anything else, the best holiday present you can give yourself is a subscription to the EO. Here's how, or cut and paste this link: https://www.smallcapnetwork.com/pages/SCNEO/v1/ Too Good For Our Own Good? If you've been reading the SmallCap Network newsletter for more than, oh, say a few weeks, then there's a good chance you already know what I'm about to say. On the chance you're not sure though, I'll say it anyway - there's no doubt Thursday's gain was impressive, but once again the market's inability and/or unwillingness to pace itself now means the profit-takers are facing a big decision. Do they lock in their big gains now, and risk missing out on anymore upside, or do they take their chances on sticking with their trades and risking a big pullback now that stocks are ripe for profit-taking again? See, nothing kills a rally like oversized gains that get would-be profit-takers nervous. If stocks were to gain just 0.4% per day for a month, nobody would think twice about it because they wouldn't realize the market had gained 8% during that time (nor would they feel like it was overbought). When you gain 4.4% in just two trading days though, it's the kind of thing that gets people's attention and makes them tense. It's kind of like trapping a dog in a corner. Even the cutest and friendliest of pooches becomes unpredictable and maybe even dangerous when they get confused and feel threatened or trapped. You know what though? There's not one blessed thing you and I can do about it. We have to play the hand we're dealt. So, let's take a good honest look at our hand. Pretty much every ceiling I had marked was broken today, in one fell swoop. For the S&P 500, that means the 20-day moving average line at 2048 as well as the horizontal floor at 2052 were hurdled, with the S&P 500's close at 2061.23.... up 2.4% from Wednesday's close. Wow. And yes, the VIX peeled back accordingly. The NASDAQ Composite and the VXN look pretty much the same, with the composite punching through its 20-day moving average line at 4720 and closing at 4748.40. From a momentum/trend-following perspective, we have to be technically bullish. Against my better judgment, I'm going to interpret these clues at face value and follow the new trend, knowing stocks have been prone to reversals of late. As prone as they've been to switching gears, it just seems like the market's been even more prone to bulls buying on any and every dip, positive that the only direction stocks can ever really go for any length of time is up. Normally I'd be a little (ok, a lot) more contrarian. As I mentioned a few weeks ago though, even conventional contrarian thinking isn't working right at this time. Most traders are so hell-bent on being bullish, you just don't want to fight that tape. A bullish outlook here isn't without its flaws, however. I noticed this more on the NASDAQ Composite's chart than the S&P 500's chart, but it's basically true for both - for the market to be up a whopping 2.4% on Thursday, the volume was surprisingly light. The S&P 500's volume was flat, and still didn't exceed Tuesday's bearish volume. The NASDAQ's volume actually fell compared to Wednesday's total, despite the big jump. The "so what?" is, if stocks are so !@#% bullish here, why aren't more people buying them? I suspect it's got something to do with the fact that deep down, folks know valuation is a problem. Rather than consciously believe it though, they choose to bury those possibilities in the back of their mind and instead assume what they see is the way things will be evermore. It kind of reminds me of a psychological study done on people who live near the downstream side of a dam that's at risk of crumbling and unleashing a flood. When the people who live five miles away from the weakening dam are asked how they feel about it, they're a little worried. The people who live just three miles away from the dam feel somewhat worried. The folks who live just one mile away from the dam, however, don't feel very worried - they (say they) feel not worried at all, certain the dam will never break. How can they remain oblivious and unappreciative of the risk? It's a coping mechanism. The actual risk to them is almost emotionally debilitating, so their brains subconsciously convince them everything is going to be ok, unprepared for the true risk. Yeah, well, it just seems like most investors have moved as close to the dam as possible, chasing gains, and therefore extending the rally. The risk of the dam breaking - the risk everyone seems willing to ignore - is a market valuation that's already back up to a trailing P/E of 18.0 and a forward-looking P/E of 16.11 (for the S&P 500). That's an unusually high valuation for any market environment. Here's the thing... overvalued or not, until the market is forced to care about frothy prices, I can see stocks continuing to rise. Bad news is seen as good news, and good news is seen as great news. Valuations don't matter because traders just don't want them to matter. That's a powerful mindset in the short run, even if dangerous in the long run. Valuations will matter eventually. As for what I see on the near-term horizon, another good day on Friday will actually set up a wave of weakness, while a modest pullback on Friday might actually cool things off enough to let this rally resume early next week. My guess is, we'll see the latter happen. We'll talk about the specifics in tomorrow's newsletter. We'll also take a deeper look at the market's earnings outlook and valuation, since I opened that can of worms today. Just bear in mind this discussion is all rooted in the short-term/long-term debate, and what your timeframe really is.