Jump in, the water is fine.

MARKET SENTIMENT

Yesterday broke out to the upside with the biggest daily gain in a couple of weeks.  The recent tight trade and bearish sentiment setup for a nice upside move, but today’s price action returns to the flat, tight trade.  But this is actually supportive of yesterday’s gains because big money is not profit taking and cynical bears don’t have the strength to weight down yesterday’s rally.  We are a fraction off of multi-year highs and market makers pay their alimony and kids private school tuition by pushing markets through key technical levels and triggering a flurry of buying and stop-loss activity.  At this point, a new 52-week high and short squeeze is a given, although we could trade flat or slightly lower first.

Technicians need to be careful in markets like this because often overbought/oversold indicators or resistance/support levels can be misleading when the market is breaking out.  I don’t buy into indicators because it isn’t the indicators that have the money I’m after.  People have money and that’s why I am always watching other traders for clues about their attitudes, positions, and emotions.  Even the VIX at these low levels can be deceiving for traders who mistakenly grasp for some signal to tell them how to trade.  The key to being successful in this game is recognizing who your opponent is and then keying off of his moves, not some lagging, second or third derivative indicator of what he is doing.

Market participants continue to be cynical and skeptical of this rally and these high market levels.  And chances are the rally will continue until we have demoralized and humiliated all these stubborn bears.  At that point the bulls will be cocky and taunt their fallen adversaries, but their joy will be short-lived because that is when the market will reverse and take the knees out from under the arrogant bulls.  That’s just the way this game works.

MARKET BEHAVIOR

Yesterday was the biggest move in a couple of weeks, but it was still relatively modest as compared to daily moves we saw over the summer.  The tight, low volatility trade will continue and we could see another week of tight trade before the next leg higher.  This is the new personality of the market and what we should expect for a while.

The low volatility comes from the lack of buying and selling from big money.  Big money isn’t profit taking at these levels, but it is also reluctant commit new capital.  And that’s why we continue tight, sideways trade.  But with each inch higher, we put more pressure on money managers under-weight this market as they fall further behind their benchmarks.  Slowly the pressure will mount and these managers will be forced to chase the markets.  For market behavior what this chasing means is desperate managers will start buying any and every dip, putting a solid floor under the markets, preventing the market from pulling back much at all.  But at the same time, they will be waiting for pullbacks to buy, so there will also be muted upside moves.  This will lead to a quiet and smooth rally, inching higher, at least for the time being.  The character will change a bit as the managers waiting in vain for a bigger pullback get more desperate and have to bite the bullet and start plowing larger chunks of money into the markets fearing they will fall even further behind.

TRADING OPPORTUNITIES

Same strategy as in the last 10 posts, find good stocks, buy them, and hold for a nice gain.  We don’t need to be as trigger happy when taking profits as we were over the summer.  Give your winners room to run and hold out for larger gains.

INDIVIDUAL STOCKS

FRAN and TDG are breaking out today.  KORS, GOOG, and HD are adding nicely to their earlier breakouts.  It seems like most everything is working and these are the environments that traders dream of.  Don’t let your fear of heights get in the way of making money.  The best buys are the hardest ones to make.  Jump in, the water is fine.