Indexes break above trading range

MARKET SENTIMENT

Markets poked their head above the recent consolidation.  No doubt this is getting the attention of those expecting a pullback and are either out of the market or short.  Fear of being left behind is a very real thing, especially for a fund manager whose performance is already lagging the indexes this year.  The market is ruthless that way and it is shaping up to be a very bad year for many money managers as they completely mistimed these major market moves.

The interesting thing from looking at a chart is noting how far we are above the moving averages and near 52-week highs.  This leads many technicians to assume the market is extended and likely to correct.  Then you add in the fundamentalists who are reading all the bearish headlines and predicting doom-and-gloom.  Heck, just a few weeks ago I fell into that trap too.  But the mistake I made was thinking about what the market should do, not what it was doing.  In the markets it is OK to be wrong, but it is fatal to stay wrong.  The market wasn’t doing what I expected, so that forced me to reevaluate my position.  This critical introspection allowed me to realize I got sucked into the wrong position and I was able to correct it in a timely manner.  Recognizing your mistakes early is the key to minimizing losses and profiting from the new trend.

MARKET BEHAVIOR

We are making new highs relative to the consolidation and pushing up against 52-week highs.  This slow and steady climb is not something we’ve seen out of the markets since the first quarter and is a departure from the summer chop.  The market never goes straight up, so we should expect some dips here and there, but so far the trend is clearly higher until further notice.  The volatility has also dropped off dramatically, making it easier for position traders to hold on for larger gains.

TRADING OPPORTUNITIES

Just when everyone was becoming most frustrated with the market is when it finally turns around and becomes a great time to invest.  The key to successful contrarian investing is knowing when to go with the trend and when to go against it.  Right now the contrarian trade is with the market because everyone else is so cynical.  In a few weeks or months when everyone comes around to this rally is when we need to be looking for the exits.  A critical nuance in contrarian trading is recognizing you are going against the crowd, not the trend.  This is a important distinction missed by a lot of people who think of them selves as contrarians when they short something that has gone up too much.   The successful contrarian trades against the other market participants, not against price moves.  Always remember that.

INDIVIDUAL STOCKS

KORS is making a huge move today, up 14% on strong earnings.  It would be a stretch to label the recent consolidation as a valid base pattern.  It could be a 50dma bounce, although the typical 50dma bounce happens when the 50dma is sloping higher and the stock is experiencing a temporary correction.  But nothing in the markets follows the textbook, so as traders we need to decide what flaws and defects we can live with.

HD, GOOG, and AAPL are also having good days and worth a look.

Stay safe