Stocks holding up nicely

S&P500 daily @ 3:38 EDT

Another tight trading day in the markets.  Technically a down-day, but such a small move is hard to flag as material.  Active trade around Thursday’s close is supportive of that new price level, even if it includes a modest slide back to 1450.  Stay long what is working, but harvest worthwhile profits because the sun can’t shine forever.

MARKET SENTIMENT

The indexes are off modestly for the second day on average volume.  This is constructive price action.  We avoided a waterfall selloff and at the same time are not rising unsustainably in a climax.  The important thing to note is current holders are not rushing for the exits.  They feel comfortable owning stocks at these levels and explains why selling volume is light and we are finding support.  On the other side, those left out of this rally are desperately hoping for a pullback to let them back in at more attractive levels.  They are reluctant to buy up here after missing the opportunity at lower levels and this foot-dragging accounts for the lighter buying volume.  But these latecomers can’t wait forever and a rising market will eventually force them to bite the bullet.  We’ll see when these reluctants start coming around in numbers because stocks will rise in a slow and steady uptrend as their buying prevents any type of pullback.

When evaluating supply and demand dynamics, combined with market sentiment, there were a lot of investors reluctant to own this market with all the headline risk and seeing short interest at five-year highs backs up this pervasive bearish theme.  But when viewed through the lens of supply and demand, this bearishness represented a large pool of available buyers.  And further, since so many investors were already out of the market, or short, that meant there were fewer available sellers remaining to push the market lower.  Large pool of potential buyers and small pool of available sellers; seems kind of obvious why the market rallied strongly these last couple months.

Traders and journalists want to assign a fundamental or technical reason to this rally, and no doubt the news played a role, but never forget, news doesn’t drive markets, traders do.  When the supply and demand became as skewed as it was recently, it made a move in one direction far more likely than. Think of it like a compressed spring.  It takes a lot of additional energy to further compress the spring, but it will uncoil by itself the first chance it gets.  And that is why the markets could pop 50 points over a couple of days.  The market wanted to go up and so it did.

I don’t think the spring is uncompressed yet, but with each surge higher we get closer to that point.  And of course the market won’t stop at zero as it almost always overshoots.  We need to watch for the point where the market is extended and thus prone for a pullback.  Up, down, up down.  That’s how the market works and getting in tune with these moves makes it far easier to make and keep profits.

MARKET BEHAVIOR

The trend since early August has been large gains followed by consolidation, before making another strong move higher.  So far the modest selloff following Thursday’s gains is consistent with this pattern.  The swing trade has been the wrong trade the last two-months and there are few sings it is the right trade today.  We could easily see a modest slide to 1450 as the market shakes out latecomers, but so far the violent moves lower are not a part of this market’s personality.  No doubt this will change at some point, just not yet.

TRADING OPPORTUNITIES

Keep doing what is working, which is buy and hold.  Let those profits bloom while the sun is shining because this calm won’t last forever.  But don’t take this too far by letting your fruit over-ripen and rot on the vine.  We’re in this to make money, not hold stocks.

PII daily @ 3:41 EDT

INDIVIDUAL STOCKS

LULU and PII are having rough days.  Both are still above their 50dma, but experiencing weakness after strong run-ups.  There is no way to know which pullbacks are normal and which are fatal.  Duration, gains, and popularity will give you a clue to how much of a run could be left, but these are just guidelines and not rules.  It is easy to make money in the markets, the challenge is keeping it.

Stay safe