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Stocks ended a two-day losing streak with a nice 0.3% gain. Friday was the sixth close above 1750 as the market consolidates recent gains and is building support at this level.
We are holding within 1% of all-time highs as recent fears are fading from memory. The market exploded higher as the weight of Taper/Shutdown/Default was lifted from its shoulders, but while we feel better about the world, most of the upside has already been realized. We get paid for owning risk, not buying comfort and anyone chasing up here is a day late and a dollar short. Most often the best trades are buying what we don’t want to buy and selling what we don’t want to sell.
Politics aside, the biggest risk facing the market is an abrupt overhaul or repeal of Obamacare. While there are plenty of stories on how Obamacare affects business and hiring, it is a known quantity that markets have come to terms with. Upsetting this balance would toss a big portion of our economy into near chaos if the bill was gutted and left for dead. What would happen to insurance policies? People with preexisting conditions? Subsidies? Insurance company actuarial tables that were designed around expected enrollments? Abruptly overhaul or repeal Obamacare and all of a sudden no one knows what the rules of the game are anymore. Markets hate uncertainty and that would pull the floor out from underneath nearly 20% of our economy. There is a good reason the market surprised many pundits when it shot higher following the Supreme Court’s ruling upholding Obamacare. The market hates uncertainty more than it hates Obamacare and the last thing it wants to do is reopening the healthcare debate.
There are two ways hot markets cools down, giving up a portion of recent gains or churning sideways for an extended period. 130-points over 15-trading sessions was an amazing run and no one is surprised the market is taking a break. The bigger question is if we pullback to support, or simply trade sideways before resuming the up-trend.
If the market holds 1750 on Monday, that shows it doesn’t want to pullback any further. It had every opportunity to slide on profit-taking and cynical bears shorting all-time highs in recent days, but this resilience is noteworthy. It shows dip-buyers are aggressively chasing even the most modest pullbacks and their money is putting a floor under the market.
With so little fear in the market, it is vulnerable to a new, previously unaccounted for risk factor. Keep an eye out for anything that could send traders scrambling for the exits. There is always risk of the unknown, but we can protect ourselves if we see it before everyone else.
Shorts should get ready to cover if the market doesn’t stumble in coming days. It is always better to get out proactively when our investment thesis isn’t working as expected and our losses are modest. Avoid the stubborn pride that makes us stick around until the market moves so far against us pain forces us out. Longs can buy continued support, but expect a slow grind higher since most of the explosive move is behind us.
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.