Stocks are mostly flat in midday trade following yesterday’s breakout.
Those with cash aren’t buying and those with stock aren’t selling. Contrary to popular opinion, complacency is bullish because confident owners don’t sell and that keeps supply tight. It only becomes a problem when we run out of buyers needed to sustain these levels. So far this year market participants have been unwilling to chase stocks above 1,900 and we drifted sideways the first five months of the year. Here we are again at the top of the trading range and asking ourselves if this is finally the real breakout, or yet another stall near the highs.
Last year’s relentless rally forced fund managers to buy a market they didn’t trust because they were more afraid of being left behind. This year the market is only up 3% over the first five months and there is very little pressure on managers to chase performance. In fact we are seeing the opposite in speculative names as everyone is trying to get them off their books. But while tech stocks stumbled, the S&P500 and Dow are making new highs. The biggest reason for the disconnect is few of these new issues are old or large enough to have been added to these broad indexes, so their selloffs doesn’t affect them. But are these canaries in the coal mine and foretell doom and gloom for the rest of us?
It is easy to find bulls and bears in this market. Depending on who you talk to, things are either great or about to implode. The most scarce opinion is indifference toward this market. In 2014, both bulls and bears have been wrong at every turn and the traditional summer doldrums are an unlikely place to break this logjam.
Expected Outcome: At the upper end of an extended trading range
Buying weakness and selling strength has been the trade of the year and there are no signals this will change as we move into summer’s traditionally slow trade. With the markets largely flat for the year, there is little pressure on managers to buy record highs and this gives them time to wait and see what happens. Without big money getting behind this breakout, it is hard to see what else will propel us higher.
If this market continues rallying, that will pressure managers to chase. While this is a more likely outcome this fall, it could happen earlier if we keep making new highs.
Buy weakness and sell strength.
Plan your trade; trade your plan
Jani Ziedins (pronounced Ya-nee) is a full-time investor and financial analyst that has successfully traded stocks and options for nearly three decades. He has an undergraduate engineering degree from the Colorado School of Mines and two graduate business degrees from the University of Colorado Denver. His prior professional experience includes engineering at Fortune 500 companies, small business consulting, 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 children.