Another day of sideways trade

MARKET SENTIMENT

Markets are stuck again at the 1400 level and struggling to make a move either direction.  This is making for boring blogging because there is nothing new and insightful to report.  We continue to show support at these levels simply because the previous pattern was to sell-off after a run up and we have instead been holding steady.

Institutional buyers are not buying, but they are not selling either.  They are comfortable with their current potions and are not looking to take profits as they would if they expected the markets to head lower from here.  But they are also reluctant to commit new capital to these markets.  Cautiously optimistic is how you might interpret this price action.

The lack of a sell-off as we dipped under 1400 this morning also shows bears are unable to mount a meaningful assault on this rally.  But the thing about the market is it will fall under its own weight if there is not follow on buying soon.  People only buy something when they think it will go up, but they can sell for any number of reasons other than thinking the stock will go down.  A pension fund will sell assets to finance its monthly obligations to retirees or a fund will re-balance part of its portfolio that has had a good quarter to get back into balance with its stated ratios.  This asymmetrical motivations between buying and selling is why stocks will tend to drift lower when nothing else is going on. The challenge for this market is finding a reason to rally after staying flat for the last week.  If we can’t find a reason to breakout, we should expect the market to drift lower for these reasons.

S&P500 daily @ 2:38 EDT

MARKET BEHAVIOR

The last time we saw 6 days of tight, sideways trade was at the end of April, which coincidentally (or not) was also at the 1400 level.  The ominous thing about this comparison is this price action indicated a stall before falling 100 points.  Will we see the same thing here, or will the third assault on 1400 be the charm?

TRADING OPPORTUNITIES

It seems the market has gotten numb to all the negative headlines the bears are shouting about, China slowdown, US recession, Euro collapse, etc.  But since everyone, even non-traders has heard these headlines, they are already fully priced in the market.  We can safely ignore everything in the media; what we need to fear and trade is the news no one is talking about yet.  Maybe that is trading a US and global recover from the long side.  Or trading the global markets will implode 2008-style from the short side.

The lack of bulls makes the contrarian in me favor the upside, but this is nothing more than a game of probabilities because there can never be certainty about the future.  There is always a risk of being wrong and losing money, but the goal is not to always be right, but to make more money than we lose by being disciplined in the way we trade.  Combining unique market insight with savvy money management is the best way to come out ahead over the long-run.