Rev Shark: Walking the High Wire
12/28/2010 9:06 AM
"With consistency a great soul has simply nothing to do. He may as well concern himself with his shadow on the wall."
-- Ralph Waldo Emerson
One thing we can say with great certainty about this market lately is that it is consistent. Once again, we find the market is overbought and hovering near the highs of the year, but there are no signs that it is about to correct. Positive end-of-the-year seasonality is in play and the mood remains quite upbeat, which trumps any negatives the bears may have.
The bears point at the high level of complacency, the extended technical conditions and the fact that the S&P 500 has been up 15 of 18 days in December -- but it just doesn't matter right now. If we didn't have this strong end-of-the-year seasonality in play it would very worrisome. But right now it just doesn't pay to fight the uptrend.
Despite the continued upside momentum, this is not a very easy market to trade. We are seeing the lightest volume of the year and conditions are very ripe for some quick reversals. On the other hand, there are always pockets of momentum in thin holiday markets. Yesterday we saw the rare earth minerals make a sharp move and that is continuing this morning as China has cut its export quotas. That group is gapping up strongly and will remain in play.
Small-cap biotechnology stocks were also strong on Monday. These tend to be the most speculative of speculative stocks since most have no revenues and have nothing more than a good story. When the "junk" biotechnology stocks are moving, it tells you that the momentum traders are becoming overconfident and scraping the bottom of the barrel as they look for action.
What adds to the concern about the speculative excess is that the big-cap leadership names such as Amazon Goo (AMZN - commentary - Trade Now) , Google (GOOG - commentary - Trade Now), Chipotle Mexican Grill (CMG - commentary - Trade Now) and even Apple (AAPL - commentary - Trade Now)are struggling. Those stocks are leaders and when small biotech and rare earth names are leading, instead it is a sign that speculative bulls are becoming overconfident.
We are definitely walking the high wire here and while there still are upside trades to be had, we have to stay vigilant and be ready to move fast should the character of this market change.
We often see some notable weakness in the early part of January once the end of the year and the beginning of the new year seasonality relents. But this market is already very ripe for a correction and it could easily kick in earlier.
It is not my style to be anticipatory. However, I do want to be mentally prepared to head for the safety of cash if conditions start to deteriorate. But so far, the trend remains our friend.
At the time of publication, Rev Shark had no positions in stocks mentioned.