Back near record highs

End of Day Analysis

MARKET BEHAVIOR
Stocks added to yesterday’s gains and recovered most of last week’s modest Crimea selloff.  Volume was  light for a second day as many buyers take a wait-and-see attitude toward this rebound.

MARKET SENTIMENT
Owners remain confident while everyone else stays cautious.  Last week’s selloff came on unusually restrained volume given the volatility and headline risk.  This week’s rebound continues the suspiciously light volume.  What this tells us is most owners are perfectly content holding on to what they have regardless of the price action or headlines.  This is a dramatic shift in sentiment from 2013 where the market was constantly spooked by an endless stream of bearish headlines.  Last year many were afraid to own stocks, this year they are afraid to sell them.

While many will claim complacency is a sign we are at a top, by itself complacency is bullish.  When no one wants to sell, supply becomes tight, making it easy for markets to rally on low volume.  Complacency doesn’t kill bull markets, lack of new buyers does.  Rather than focus on owner’s confidence, we need to look at who is buying record highs.  Last year’s bond market selloff flushed many long time bond owners out of that market and their shift to equities propped up stocks.  But we’ve seen a rally in bonds in recent months, taking pressure off bond owners.  This means there are fewer bond sellers and less money to reallocate to equities.  Other investors fled volatility and uncertainty overseas, causing them to seek the safety and security of US equity markets, but those that are still in foreign markets are probably in it for the long haul and we should expect the flow of international investment in our markets to slow.  While it doesn’t take much demand to prop up prices when confident owners keep supply tight, we need to see new money continue flowing into our markets to extend this bull market.

TRADING OPPORTUNITIES
Expected Outcome: Near record highs, but vulnerable to a pullback into the trading range
Stocks are rebounding on light volume, showing low participation on the buy-side.  We can continue heading higher as long as owners stubbornly hold on to their positions, but waning demand threatens to let us slip back into the 1,750-1,850 trading range.

Alternate Outcome:
Nothing gets people excited about stocks like rising prices.  Those left out of the rebound from the 2009 lows are starting to warm up to stocks again as they hear about all the money their neighbors and coworkers are making in the market.  While this can keep pushing us higher for months, these buyers are usually the last to show up before prices roll over so be careful.

Trading Plan:
While it feels like the market wants to challenge 1,900, this is the later stages of this rally leg and we should be taking profits, not establishing new positions.  While we are in a decade long secular bull market and buy and hold investors can sit tight, expect intermediate dips along the way.  Shorter timeframe traders should continue buying weakness and selling strength.

Plan your trade; trade your plan