We surged to all-time, intraday highs in early trade.
There is what the market should do and what the market will do. Too often traders get the two mixed up.
Another rough day for bears as they scramble for cover. Somewhere along the way the widely expected Tapering collapse turned into the Tapering rally. Who would have guessed, but that’s what we get for thinking too much about what the market should do instead of focusing on how other people trade it. The market is nothing more than a crowd of people trading their opinions and biases. When all the nervous sell and pessimists short, we run out of sellers and rally on tight supply. There is no magic to this, it is simply Supply and Demand 101.
We started the year with a laundry list of items justifying a market selloff. Obama’s reelection, Fiscal Cliff, Sequester, Debt Ceiling, negative GDP, Europe/Cyprus, and countless others. Tapering was the latest worry and the market was bent out of shape over it for a few days. But since it was such a widely expected event, we knew it was mostly emotional selling and it would exhaust itself quickly, which is exactly what happened.
While not completely past Tapering fears, new all-time highs are quickly eliminating most anxiety. After traversing all those dark clouds the first six months of the year, it finally feels like we are getting to a place where the sun is shining. After we Tapering, I cannot think of anything the crowd is obsessed with and that makes me nervous. While we can safely ignore what everyone is talking about, we should fear what no one sees. I don’t know what it is and when it will happen, but there is trapdoor out there somewhere and it will catch us by surprise.
Little doubt this early strength was driven by short-covering. This leads to a flurry of buying, but expect the rate of gains to taper because most traders have a natural fear of heights and are reluctant to buy all-time highs.
Markets climb a wall of worry and if we are running out of things to worry about, then the rally will run out of fuel. We are not there yet because plenty of recent sellers will chase the market higher, but once they buy-in, demand will taper off.
Move our trailing stops up and see where this will go.
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.