Weekly Analysis: Why this market is doing so well

Weekly Analysis: 

It was another positive week for the S&P 500 with the index climbing 0.8% over the last five sessions. While no one is excited by a sub-1% week, given where we could be, this resilience is actually a noteworthy accomplishment.

Covid infection and hospitalization rates are off the charts and setting new records nearly every day. November hiring also tumbled dramatically from October’s levels due to expanding Covid restrictions. Either of these headlines could have triggered a stock crash, yet neither one did. Instead, stocks closed the week at record highs. Funny how that works.

This is another data point confirming this is a half-full market. Rather than sell the disappointing employment headlines, traders bought the increasing prospects of additional stimulus.

We don’t trade the news, we trade the market’s reaction to the news. At this point, there is nothing to do but go along with the trend and keep moving our stops up. Maybe this house of cards will come crashing down at some point, but we are not at that point yet. If this market was vulnerable to a collapse, it would have happened by now. Instead, most investors continue looking toward the future with optimism and that’s the way we need to trade this.

But none of this should surprise anyone who’s been reading this blog for a while. We know better than to trade what we think should happen. Instead, we always focus on what the market is doing. And right now, it is ignoring all of the bearish headlines. As traders, if the market doesn’t care about the headlines, then neither should we.

As with any bearish event, there always comes a point where the stock market has fully priced it in and it starts looking toward what is coming next. Everyone knows how bad this latest Covid flareup is and understands what it is doing to the economy. Yet these same investors keep holding because they know we are getting closer to the end of this mess.

I’m still concerned about the lingering collateral damage affecting the economy next year. But as long as investors are fixated on the recovery, that’s the only thing that matters and so far the recovery is progressing nicely. Once we get past Covid, investors might take a more critical eye of lingering unemployment and damage to corporate balance sheets. But as long as the stock market is not concerning itself over these things, then neither should we.

Stick with what has been working, which is owning this rebound and following it higher with a trailing stop. While we are vulnerable to a pullback at any time, at this point, it seems like most investors want to keep holding for higher prices. As long as this remains a half-full market, expect any weakness to be fleeting and to bounce back quickly.

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