Rev Shark: Stay Nimble and Flexible
06/16/2010 7:56 AM
No, no, you're not thinking; you're just being logical.
-- Niels Bohr
Navigating the market gyrations is never an easy task, but the recent movement is causing more than the normal amount of frustration. Even the folks who tend to love any positive action are expressing their dismay over the lack of logic this market is displaying.
The market is never a totally rational beast. If it were, we would just program our computers and print money. But generally the normal the market irrationality isn't so extreme that it appears to be random.
The action yesterday was a good case in point. There was a good bond auction in Europe, which helped to prop up the euro. But the news flow has been very negative lately with a poor report from Best Buy (BBY - commentary - Trade Now) Tuesday morning helping to confirm that consumers may be retrenching once again.
I'm not going to repeat all the negative news we have heard recently, but it has been consistent - and the Gulf of Mexico oil leak disaster and the European sovereign debt situation are far from any clear resolution. Nonetheless, the market gapped up and then ran straight up all day. Breadth was extremely strong and volume nothing spectacular.
I believe part of what drove the action was that there was such an extreme focus on the obvious technical overhead levels around 1108. Even the folks who don't normally pay much attention to the charts were aware of that level and no one wanted to be left out of the breakout. Once the market set its sights on it, there was no turning back regardless of any fundamental consideration.
A lot of folks are confused by this seemingly random strength, but what we need to do now is focus on what happens next. The biggest problem with yesterday's action is that it just isn't a very impressive technical breakout. It is difficult to trust that momentum is building and that buyers are going to be aggressive out of fear they will miss the turn.
On the other hand, for over a year this market has consistently moved higher following these sorts of flimsy breakouts. In fact, light volume moves seem more likely to result in a lasting follow-through than higher volume moves. Investors who have tried to short these sorts of moves have consistently lost money and have probably helped to fuel more upside.
Last night, quite a few folks were joking about how the market would be sure to gap down this morning to trap the bears just like it gapped up to trap the bulls on Tuesday. It isn't a huge gap, but the premarket is gapping down a bit as the euro strengthens, FedEx (FDX - commentary - Trade Now) earnings disappoint and nothing new has come from President Obama's televised energy speech last night.
Technically, Tuesday's action has pushed the market into a short-term uptrend, so we need to respect that. But given the randomness of the action, there is little reason to be aggressive with new buys. I'm staying very selective with the charts I buy and that means I continue to hold high levels of cash. There just aren't a lot of great setups for position trades as we deal with major resistance after a low-volume bounce.
We'll see if the buyers jump in on this early weakness and then we'll go from there. Just stay nimble and flexible. We are dealing with a random market and that requires a high level of vigilance.
No positions.