Stocks traded modestly higher following Friday’s record close. Over the last few months the markets established a pattern of consolidating new gains and restrained trade here is normal and expected.
No one knows what to make of this market. Everyone thinks it should go down, but it keeps heading higher instead. Even bulls expected modest weakness following the powerful first quarter. This shows how much everyone knows; if this were easy, everyone would be rich.
The reason the market keeps heading higher is the widespread skepticism and reluctance to buy and hold. If everyone already sold, who is left to sell? When supply dries up, there is nowhere to go but higher. Obviously I’m exaggerating when I use labels like “everyone” and “no one”, but you get the idea. Traders are wary of this market and most of the proactive and defensive selling already occurred. I attached another unscientific survey from Yahoo Finance and it shows bearishness is far more pervasive than bullishness. It appears the crowds of bulls are simply a figment of bear’s imagination.
The reason contrarian investing works so well is the crowd’s opinion is already fully expressed in market prices. Any news that simply reinforces these beliefs will not move the market because it doesn’t change anyone’s mind. Further, the reason the market often moves the opposite direction is once something is fully priced in, the only move left is the crowd changing its mind. This market makes perfect sense when looked at from a supply and demand vantage. Cynics can no longer push the market lower because they are already out. The only thing they can do is move it higher by changing their mind and buying back in. When the group expects one thing, we often get the opposite.
The market often consolidates gains because big money doesn’t like buying new highs and prefers waiting for a modest pullback to add to their positions. This leads to the wavy trading range of stalling near highs, but solid support after modest selling. A pullback to 1590 fits this behavior and is supportive of the recent breakout. At this time there are no signs buying is slowing down and the smart trade is sticking with the trend.
Every correction begins with a new high. Without a doubt Friday’s high could be that day, but going against this market here is picking a top and the smart trade is waiting for signs of weakening support. Until we set a trend of lower-highs, lower-lows, and break key support, assume the uptrend remains intact.
Modest weakness following Friday’s new high is expected and should not be feared. It is tough to buy these new highs since often see better prices in coming days. A day-trader could short intraday weakness, but look for support above 1595 and another buyable dip as big money floods in. As long as the market holds recent support at 1580, everything looks great. Breaking 1580 means another test of the 50dma. Failing the 50dma and 1540 will likely lead to larger selling and a test of the 200dma.
Plan your trade; trade your plan
Jani Ziedins (pronounced Ya-nee) is a full-time investor and writer who has successfully traded stocks and options for more than a decade. 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 manufacturing engineering at Fortune 500 companies, structural engineering, small business consultant, collegiate instructor, 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 young children.