The market is off in light, holiday-like volume this morning. Seems most traders are waiting for the start of earnings season before placing their bigger bets. It will be interesting to see what companies report and how it matches up with the market’s expectations. We’ve been hammered all spring with bad news out of Europe and US jobs, making a relief rally seem plausible. But seeing how we are already within 6% of 4-year highs, it is really hard to argue the market is still in an over-sold condition and poised to pop at the slightest hint of good news.
Now don’t mistake me for one of the bears who is claiming we are on the edge of the precipice, about to “financial contagion” our way back to the stone age. The world is only dangerous when we are complacent and oblivious to the risks around us. With all the scary headlines out there, it is hard to make a case the market is blind to the dangers surrounding of us.
But rather than simply hang out at one level until it has conclusive evidence for a move one way or the other, the market is always trying to predict the future. We trade one way or another for no other reason than to grind up premature directional traders who are trying to get a jump on the rest of the market. We’ve already seen this with a 130 point sell-off in May and a 110 point rebound in June. And no doubt we could have a couple more hundred-point moves left before we break out of this summer’s trading range.
The danger of breakout trading during a flat market is you keep getting zinged from each failed breakout. Worst case is you hold to your 8% stop-loss, which doesn’t seem too bad until you consider 3-failed breakouts in a row is a 22% loss. This is more than most people made in the strongest first quarter rally in 20 years. And then of course the follow on risk is all the psychological damage to you and your account will make you more reluctant to stick your neck out on the fourth follow-through-day, fearing another repeat of the first three failed FTDs. But the thing about FTDs is each successive failure makes the next one even more likely to work out. A fourth FTD is very likely to work out and the exact one most people will sit out after having been burned by the first three.
Of course the market could be totally hoodwinked me and my expectation of a near-term move down too. If there are too many contrarians out there, they are no longer contrarian and now constitute the majority opinion. At that point the real contrarian needs to go against the contrarians. The real skill of contrarian trading is knowing when to trade against the market knowing when the contrarian trade is to go with the market. For example in the first quarter, the contrarian trade was staying long the market while everyone else was calling for a pullback.
Just a few stocks are making the cut on IBD’s Stocks on the Move screen today. This list identifies leading stocks up in high volume each day. And none of the 6 stocks making the cut today are near proper buy points. This just reinforces the market’s wait and see attitude toward earnings season.
Jani Ziedins (pronounced Ya-nee) is a full-time investor and writer who has successfully traded stocks and options for more than a decade. He earned a B.S. in Mechanical Engineering from the Colorado School of Mines and an MBA and M.S. Marketing from the University of Colorado Denver. His prior professional experience includes manufacturing engineering at Fortune 500 companies, structural engineering, small business consultant, collegiate instructor, and managing investment real estate. He is now fortunate enough to trade full-time from home, affording him the luxury of spending extra time with his wife and two young children.