End of Day Update
An uneventful day with only 5-points separating the highs from the lows, ultimately finishing unchanged. The market is 60-points above the 50dma and aside from Friday’s elevated quadruple witching, volumes have been below average.
Stocks are at record highs and the VIX near record lows. There has never been a more comfortable time to own stocks and this complacency has many owners holding regardless of headline risk. This lack of interest in selling keeps a lid on volatility and every five- or ten-point selloff stalls and bounces when no one joins in the selling. With so little supply hitting the market, it is extremely easy for the market to continue climbing higher.
But the lack of concern means we are closer to the end of this move than at the start of a new leg higher. Sustainable rallies are built on the back of fear as they climb the proverbial wall of worry. When no one wants to own the market, it allows the bold trader to buy stock at steep discounts. But as the masses become comfortable owning stock, they will only sell if someone offers them a premium price. This bouncing between discount and premium is what gives us the typical gyrations in the market.
Given where we are and where we came from, it is hard to claim sellers are dumping shares at a discount here. Since humans naturally look at the recent past and expect the trend to continue, many traders are sitting on their stocks expecting the good times to continue well into the future. And they will be right as long as we keep finding new buyers willing to pay even higher prices for stocks. This is the basis for the “next greater fool theory”. Many people continue holding stocks even when they know they are too high because they assume someone else will come along shortly who will pay even more money than they did, and so far they’ve been right. But how long will the music keep playing?
Expected Outcome: Keep inching higher until something catches the market by surprise.
Everyone knows the VIX will not stay at 11. What no one knows is why it will spike or when that will happen. Will insurgents blow up a key pipeline in Iraq? Will economic indicators start heading south? Will a geopolitical event thrust uncertainty into western economies? Will it be a natural disaster? I have no idea what it will be or if it will happen next week, next month or next year. Knowing what will happen is easy, all the money is made getting the timing right.
There is no reason we cannot have another 30% year before the inevitable fall. So far the right trade has been ignoring all the calls for a pullback and it will likely continue this way…..until it doesn’t.
It is more profitable to buy discounted stock and sell it at a premium than the other way around. While buy-high, sell-higher can work in individual momentum stocks, the broad market is so large it rarely gets as carried away by the momentum trade. We go a little too high and then we go a little too low and then we go a little too high again. Repeat until either rich, broke, or confused.
It is hard to find discounts up here to justify the risk/reward of initiating new positions, but those sitting on profits can use a trailing-stop to protect their profits if things start to break down. As for the shorts, you will be right at some point, the key is not getting killed between now and then.
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.