Creeping higher

S&P500 daily @ 12:37 EDT

MARKET SENTIMENT

Everyone is expecting either a pullback or a full on correction from these levels.  But the thing about contrarian trading is it is going against the crowd, not the price.  Too often people confuse contrarian trading as trading against a move that has “gone too far”.  The truth is contrarian trading has nothing to do with price and everything to do with the crowd.  If too many people think the market has “gone too far”, then there is still fuel in the tank and the contrarian trade is to stick with the trend.  And I think that is exactly where we are now.  Follow the gurus or discussion boards and you’ll hear tripple-top, pullback, shorting opportunity and all that kind of chatter.  It is hard to find a bull opinion amongst all the bearish noise, but that is why the market continues to creep higher.

Contrarian trade is simply supply and demand at work.  People trade their convictions.  If they are bearish, they have already established bearish positions.  People holding positions can no longer influence the market and are only along for the ride because only new trades move prices.  So if everyone is bearish and has already established their positions, that means there is no new selling left to drive prices lower and inevitably they start going higher.  The move higher will then accelerate as the bears are forced to unwind their short positions in a short squeeze.  And the market will continue even higher as bears capitulate and convert to bulls, forced to chase the market higher.

Even if the market does trade lower, all the already established bearish positions means there is not much gas left in the tank to sustain a move lower.  In fact, the bears will even support the market as they start taking profits by buying back their shorts.  This bearish profit taking will slow down any move lower.

There continues to be lots of talk about the low volume, but that is just big money’s reluctance to commit to this market, another bearish attitude.  As the market creeps higher, the pressure to keep up with their benchmarks will force big money to chase the market higher.  And because they are behind their benchmarks, they will have to trade aggressively to catch the market that left them behind.   This aggressive trading by big money could cause high beta stocks to surge, something to keep an eye on.

MARKET BEHAVIOR

Clearly the new personality is blander than bland.  About the only traders who can make money in this market are sellers of option premium.  Even day traders are frustrated by the super tight trade.  Obviously the swing trade is dead, but that doesn’t stop people from continuing to trade what worked this summer.  We are creatures of habit by nature and that is something we as traders need to overcome.  If something worked well for us before, we continue to go back to it even if it is no longer working.  To be successful, we need to recognize and trade the new personality, not get stuck trading what is no longer working.

TRADING OPPORTUNITIES

Based on market psychology, the best trade continues to be on the long side.  Volatility is so low that day trading and swing trading the indexes is futile.  The best trade is to buy the indexes or good quality large cap stocks and holding for an extended period of time.  But while large caps have dominated small caps recently, there is a good chance small caps will start to catch up, especially if money managers under-performing their benchmarks are forced to take on extra risk to make up ground.

We could see some ugly headlines, but the market seems to be ignoring them and further, the Europeans seem to be really quiet lately.  Maybe they are all on vacation and that explains the lack of news, but it really seems like all the different groups are getting on the same page and recognizing what needs to be done.  Compromise in politics is difficult, but I think the Europeans are finally balancing both austerity and growth concerns and needs of all the parties involved.

PETM daily @ 12:37 EDT

INDIVIDUAL STOCKS

PETM popped today and made a new high.  You could call it a flat base or a 50dma bounce.  Either is a valid entry point. HD is continuing to run.  KORS fell back to the gap, but has since reversed higher.  So far leading stocks are doing well.

It is funny to see AIG and TYC making the cut as high quality stocks by IBD’s metrics and showing up in the Stocks on the Move screen today.  I’m not sure I would call either high quality, but as WON says “All stocks are bad unless they go up.”  By that metric TYC with its 84 RS and AIG with its 92RS make the cut as good stocks.  Not that I am recommending either, but they are doing quite well and qualify as turnaround stories, a valid CAN SLIM trait.