Pausing or stalling?

S&P500 daily at end of day

End of Day Analysis

MARKET BEHAVIOR
Stocks dipped in early trade, but rallied back to breakeven by the close.  We stopped just shy of resistance at 1,810 as buyers were unwilling to chase the market higher for a second day.

MARKET SENTIMENT
Depending on your point of view, either the market took a break following yesterday’s impressive rally, or it stalled as demand dried up.

In this afternoon’s post, I discussed who is sitting out of this market and what it will take to get them back in.  Tonight, I will look at who is already in the market.

Momentum traders are on board this rally.  They learned months ago it is futile second guess this strength since they regretted every dip they sold because it quickly rebounded to new highs.  Last week they said markets will continue higher because of QE.  Now they say we don’t need QE to keep on going.  At this point they  just invent reasons to keep holding.

Paranoid traders who avoided this market because of Fiscal Cliff, Sequester, Obamacare, Contagion, Shut Down, Debt Ceiling, etc no longer have an excuse to not own this market.  Now Taper’s come and gone, there is nothing to fear except being left behind.

It is easy to forget about the buy and hold crowd since they never trade.  They don’t buy much and sell even less, making them mostly a ghost when trying to anticipate near-term market moves.

Most shorts bought with both hands yesterday as they were forced to cover on the strong rebound.  All that are left is the most stubborn shorts who are unlikely to buy back their shorts no matter how high this goes.

An entire herd of former bears are now enthusiastic bulls.  These traders blow with the wind and are the ones who helped us go from 20% bulls a few months ago to nearly 70% now.  As they changed their mind, their buying fueled this rally to all-time highs.  But the remaining 20% bears are a stubborn bunch and we have better shot at getting Bozo the Clown elected president than persuading any of these hardened bears to join the party.

TRADING OPPORTUNITIES
Expected Outcome:
While I respect yesterday’s extremely bullish reversal, I have a hard time getting excited about a market with so few buyers left to keep pushing this rock uphill.  Call me stubborn, early, wrong, or better yet all three, but I simply cannot embracing the market here.  I’ve been a raging bull since the bottom back in November 2012, but there just comes a point when expecting continued strength doesn’t make sense any more.

While the largely meaningless trade of the next couple weeks is unlikely to move the market far, things will get interesting in January, especially once some of the early adopters of this rally pass the 12-month mark and can start locking in long-term capital gains.

Alternate Outcome:
These things go longer and further than anyone expects.  That is clearly the case for this rally that most called a dead cat bounce back in January.  While the ranks of bears and cynics thins by the day, their capitulation buying is what keeps this rally alive.

Trading Plan:
We are coming into year-end and volume will drop dramatically next week.  Low volume allows smaller trades to have a larger impact on prices and we should expect increased volatility.  Maybe we run up, maybe we come down, or maybe we just chop around, but without the big players the market behaves far less predictably.  Buy and hold can sit through it, but the rest of us should consider taking some time off.

Plan your trade; trade your plan