Rev Shark: Look Ahead to Earnings
04/06/2010 7:41 AM
Faced with the choice between changing one's mind and proving that there is no need to do so, almost everyone gets busy on the proof.
-- John Kenneth Galbraith
Just about everyone is scratching their heads and wondering when this market might finally be hit with some profit-taking. Conditions have been unchanged for almost two months now and are still showing few signs that a top is near.
The gain since Feb. 5 has been quite substantial, but most remarkable has been the consistency of the action. The S&P 500 has pulled back more than 1% just once -- way back on Feb. 23 -- and if you have been waiting to buy on a dip, you have had almost no opportunity to do so.
If you are an active trader, you only have two choices for dealing with this sort of action. Either you keep riding the momentum until it fails or you try to anticipate a turning point. I don't have to tell you which approach is working better. Market players have not cared one bit about the indices being technically extended and negatives like higher interest rates, a stronger dollar and higher oil have been shrugged off as we chug along relentlessly.
The problem for momentum investors and trend traders is that little volatility makes it impossible to find good entry points. The essence of momentum trading is summed up in the old saying, "Buy the dips and sell the rips." However all we have had is rips, and that is leaving more and more folks on the sidelines as they sell into strength and then are unable to find new buys.
This has been one of the most hated rallies I can recall. I think that hatred is largely due to the lack of participation by individual investors. Many never returned to the market after they were pummeled in the meltdown, and those who did return have struggled to reconcile this buoyant market action with the economy that is very slowly starting to improve. It seems the market has already priced in a very rosy future, but most individuals are still very worried about jobs, real estate and the pace of economic growth.
Like most other traders, I've found this market that moves only in one direction to be a challenge to trade. I've dealt with it by not trying to anticipate a top but by staying short-term bullish and being very zealous about protecting gains while I have them. Until we actually have some pullbacks or flat action, it is going to be very tough to be aggressive.
The good news is that earnings season is fast approaching, and that will be a good source of potential volatility. At the moment all news is good news, but this straight-up action into earnings season has the potential to create some "sell the news" action if companies do not live up to the high expectations that have been created over the past two months.
Early indications this morning shows some slight weakness. European markets are back open after the holiday and are playing catch-up with some gains while in Asia it is a bit more mixed with weakness in Japan while China remains closed.
We have a Treasury auction and minutes of the last FOMC meeting this afternoon, but there is little economic news to drive the action. The dollar is going to be key once again. Strengthening there is likely to be the catalyst for some selling.
