Bears, cynics, short-sellers, and profit-takers can’t dent Bernanke’s rally. Stay long what is working, but be on the lookout for the market’s impending personality change.
Follow-on strength for Bernanke’s rally is keeping markets near 52-week highs. So far profit taking by swing traders and doubling down by shorts have been unable to dampen the party. No doubt many cynics are reevaluating their bearish views as the market is steamrolling them and disregarding any and all logical reasons it should go lower.
It feels like we are passing the threshold between fear of a correction and moving into fear of being left behind. Investors are quickly forgetting about all their well thought out bearish research and are instead shifting gears into chase mode. This is a major transition in market sentiment as bears and reluctant investors are throwing out their previous opinions and jumping on the bandwagon. This shift won’t happen simultaneously the a short squeeze does, it will occur over a period of time causing the market will wedge higher as this late demand props up the market and supports every dip. Over shorter periods of time the market is all about supply and demand. Bears and underinvested are coming around and buying this market, pushing it higher.
Markets can go up, down, or sideways, and without a doubt this market is going up. We decisively broke above recent resistance and are making 4-year highs. The swing trade of the summer is clearly behind us and we are in the middle of a very directional move, but we must be wary of any pattern that is becoming too obvious. Previously there was a lot of reluctance by market participants to buy these breakouts to new highs, but the tide is turning and that will impact the market’s behavior going forward. Breakouts and consolidations could become breakouts and wedges higher. There is still room in this move as the former cynics change their tune and roll into the market, propelling this rally further and longer than anyone expects, but that will also be the final push of this move. Depending on how high we eventually go, we could expect a sideways consolidation if the gains are more moderate, but if the rally gets carried away, we could see a correction to compensate for the overshoot.
Continue holding stocks for worthwhile profits, but at the same time don’t get greedy. Remember, we are in this to make money, not own stocks. This move will go further than most expect, but it will also end when everyone is most optimistic. When you start day dreaming about what care you are going to buy with all your profits, let that be the baring warning siren to sell and wait for the next trading opportunity.
Jani Ziedins (pronounced Ya-nee) is a full-time investor and financial analyst that has successfully traded stocks and options for nearly three decades. He earned a B.S. in Mechanical Engineering from the Colorado School of Mines and an MBA and M.S. Marketing from the University of Colorado Denver. His prior professional experience includes engineering at Fortune 500 companies, small business consulting, and managing investment real estate. He is now fortunate enough to trade full-time from home, affording him the luxury of spending extra time with his wife and two children.