Watching paint dry

MARKET SENTIMENT

Another boring day in the markets as the S&P500 continues hovering around 1410.  This is like watching paint dry.  No doubt people are looking to Bernanke’s statements from Jackson Hole, but in all honesty this is nothing more than the market’s latest obsession.  Bernanke will say something, the market will go crazy for an hour, and then it will be forgotten as the market start obsessing about the next make-or-break data point.  Where does it end?  More importantly, does it really matter?  Is the market and financial press too obsessed with looking at its feet to see where it is going?

Most of the time I discount news because it doesn’t matter much.  Markets don’t trade on news, they move on traders’ expectations of the future.  News affects this perception to a degree, but it doesn’t move the markets, only traders do that.  The problem with news is it is always seen through participants’ preconceived biases and this distorts any story into what the market wants to see.  This is why the market can pop on horrible news and crash on great news.  If we really want to identify where the market is headed, we need to focus on other traders, not the noise.

By most measures it is hard to argue there has been much positive news in the financial press, yet the market continues rallying.  This screaming divergence means something powerful is going on under the covers and most people don’t see it.  Sometimes traders can be in denial and stubbornly holding on to positions thinking they can out-wait the storm.  This is what happened in late 2008 as the market imploded long after the cracks in the financial system were exposed to the world.  But the attitude back then was “everything is fine” and “these repressed valuations represent great buying opportunities.”  Is that where we find ourselves right now?  Are traders salivating at these attractive valuations and most traders are optimistic about the future?  I sure don’t see that surveying CNBC or StockTwits.  Seems most everyone is cautious and reluctant.

What if this divergence is due to an under-invested market?  Traders are afraid of this market because of all the perceived risks.  They fear another meltdown and it is nearly impossible to find anyone who thinks stocks are a bargain at these four-year highs.  But if the market is truly in such bad shape why has it pushed up this high?  Most experts justify the rally by saying it is overbought by novices chasing the market.  But I can tell you from first hand experience with local investor groups in my area that retail investors are not buying this market, they are just as afraid of it as everyone else.  If it is not the novices moving the markets, what is pushing us higher?

I think it is lack of supply.  This is why we have low volume and rising prices.  All the sellers have already sold and everyone else is holding on.  Lack of sellers is pushing us higher and chances are this trend will continue as fear of a crash is slowly replaced by fear of being left behind.

MARKET BEHAVIOR

Frustratingly tight trade continues.  Support has moved up to 1410 for the time being.  We could see volatility surrounding Bernanke’s comments, but over the last couple months the market has initially sold off after Fed’s comments disappointed markets, but the same day the markets turned right back around and recovered those losses.  It will be interesting to see if this trend of sell-off and then rally continues this time.  If the post-comment weakness persists, it could indicate a new trend for the market, but another rebound will be a green light to stay long, or get longer.

TRADING OPPORTUNITIES

Continue holding high quality stocks breaking out of sound bases.  Most everything is working and pullbacks are minor to non-existent.

INDIVIDUAL STOCKS

FRAN and GOOG are having good days and exhibiting follow on strength to earlier breakouts.  UNFI is breaking out on volume.  On the downside, TFM surged higher and them came crashing down on huge volume.  It is still well above its July buy-point and 50dma  and doesn’t need to be sold today, but any owner should put this one on a short leash after today’s volatile moves.  And when in doubt, remember it is better to be out of the market wishing you were in, than in the market wishing you were out.

Stay safe