Another record high

End of Day Update

MARKET BEHAVIOR
Stocks surged into record territory, smashing resistance near 1,925.  Volume was below average, but the highest in a week as today’s gains gives us 12 winners out of the last 14 sessions.

MARKET SENTIMENT
Last year we had a laundry list of reasons to avoid this market, but this year people are struggling to find excuses to stay out.  While that has been bullish as the last of the holdouts buy in, market rallies are typically built on fear and uncertainty not calm and confidence.  After years of fearing a financial collapse around every corner, we’ve reached the point where most are more worried more about being left behind than the sky falling.  While that sentiment reversal pushed us to record territory, a lot of good news has already been priced in and there is little, if any, discount being offered to hold market risk.  While we can skate on thin ice all day long and never fall in, the lack of a risk discount leaves us more vulnerable the next time something rattles the market.

The higher we go, the harder we fall and is why periodic pullbacks are a critical part of every sustainable rally.  While we’ve had modest dips and consolidations along the way, most owners have grown accustomed to buying dips and have forgotten how scary and painful the market’s dark side can be.  While I was expecting summer weakness to refresh this market, it appears like we might climb through the summer, leaving us vulnerable to an even larger pullback in the fall.

2013 was the year of the half-empty market as everyone focused on the risks.  At the end of last year we transitioned to 2014’s half-full market where we embraced the nuggets of optimism and shunned any negativity.  Today we cheered the most aggressive rate policy in ECB history without pausing to ask why such dramatic actions are needed.

TRADING OPPORTUNITIES
Expected Outcome:
We will keep heading higher as long as buyers are willing to throw money at record highs.  This will continue as long as the fear of missing profits trumps fear of losing money.  But once that other shoe drops, the exits will be crowded.  While we all know this market will pullback at some point, no one knows when or why it will happen.  This is simply a waiting game and as long as the market continues heading higher, all is well with the world.

Alternate Outcome:
We are in a secular bull market and we can go many years without a meaningful pullback as long as there is new money waiting to come in.  Given how deep the 2008/2009 market crash was, there is still plenty of money sitting out of this rally.

Trading Plan:
Chasing record highs is the riskiest time to jump in and anyone not already in the market will be better served waiting for the inevitable pullback to at least 1,925.  Those lucky enough to be sitting on profits should move up their trailing stop and be ready to take profits if cracks start appearing.

Plan your trade; trade your plan