Stocks are down fractionally in midday trade. So far the market is holding 1,875, but struggling with former resistance at 1,880 that stretches back to early March.
The bears identified a mountain of reasons this market should breakdown, but instead it holds within 1% of all-time highs. There are times the market does what we think it should, and there are times we are wrong. When the market doesn’t behave as expected, it means our analysis is flawed and there is something big we overlooked.
This morning bears are pounding the table over Ukrainian tensions, earnings, weakness in momentum stocks, head-and-shoulders tops, low-volume up-days, among many other things. So why isn’t the market cracking wide open? The short answer is supply and demand. Most of the problems bears are promoting have been around for a while. Anyone who fears these issues already sold in the dip to 1,815. That means everyone left holding isn’t worried about these fears and they are priced in. While there are scary things abound, we cannot forget markets only move on supply and demand. When everyone already sold these headlines, there is no one left to sell and the market firms up on the resulting tight supply.
But supply is only half the equation. For this strength to continue, we need fresh demand. The last time we were at these levels, buyers refused to step up and is why we slipped to the low 1,800s. Will this time be any different? The most obvious near-term buyers are shorts, momentum chasers, and breakout buyers. All three of these groups react to prices moves, not underlying fundamentals. The higher we go, the more these guys buy the market. Until we clear old highs, expect these traders to keep buying this strength.
Expected Outcome: Pushing toward the upper end of a trading range.
All the Chicken Littles running around because of a 5-point selloff need to tone it down a notch. Two-steps forward, ones-step back. Everyone knows that, so why do they overreact to the smallest gyrations? While buying here is late in the game, we most likely still have upside and a shot at cracking 1,900 in coming day. But at the same time I expect we are still in an extended trading range and this strength will not trigger the next rally leg. Instead we will drift back into the 1,800/1,900 trading range and stay there through the summer
Bears might be right. This could simply be a false bottom and we have a date with the 200-dma in May. While I’m not a big believer in “Sell in May”, it only matters what other people think. If they start selling head of summer vacation, that will push us lower. Once we break recent lows, people start selling for no other reason than everyone else is selling and we continue lower in a downward spiral.
It is too late to buy the dip after six-consecutive up days that recovered 60-plus points. While we still have some upside left in this move, the risk/reward does not favor new positions. At the same time, it is early to short the market and bears should wait for that last surge higher before trading against this strength. For those with long positions, start looking for an exit and either sell proactively or use a trailing stop to protect recent profits.
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.