Quite a Challenge

 | Jan 30, 2013 | 8:24 AM EST  | Comments
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"This life's hard, but it's harder if you're stupid." -- "The Friends of Eddie Coyle"

The S&P 500 has gone almost straight up since the first of the year, but trading the trend isn't as easy as it looks. If the indices are green the folks on television celebrate and trade high fives, but they really don't have any appreciation of how challenging a one-way market like this can be for traders who are trying to capture gains.

My advice lately has been to stay with the trend and don't start looking for tops until there is some actual price weakness. That has been spot-on, but even if you have been relentlessly bullish it still can be quite difficult to keep pace with the market and rack up good gains. I don't even want to imagine what a nightmare this market has been if you are bearish and trying to fight it. Making money, even if you stick with the trend, isn't all the easy when the market moves in this manner.

One of the big changes in the market since the crash of 2008-09 is the way in which these rallies play out. As long as there has been a market there have always been strong uptrends, but recently the trends have been amazingly V-ish and lopsided. There is very little ebb and flow along the way. The market just goes straight up and the only way to add long exposure is to chase things that, many people feel, are technically extended.

Because of this one-way tendency, many traders focus on nothing but buying stocks with big volume that are hitting new highs. It doesn't matter if it is up 10 days in a row. If it is still trending up on good volume, they are willing to chase it because they are confident that there are other traders willing to do the same. When you are buying super-extended stocks there is higher risk and it is extremely easy to be whipsawed when a strong stock suddenly turns. Take a look at DDD for a good example of this.

Perhaps my memory is a bit faulty, since it has been so long, but it used to be possible to take advantage of some real dips within an uptrend. These days a dip is generally about 15 minutes of negative action before the market reverses and goes straight up again. If you aren't already in, you have to be willing to jump on a roaring locomotive to join in.

The point is that navigating a market that is going straight up, even if you are wildly bullish, isn't nearly as simply or easy as it looks.  Despite another strong day yesterday I heard many bulls wish for some pullbacks so that things would reset. The more the market goes up in a straight line the harder it becomes to find stocks to buy.  My watch list has been shrinking every day lately as very few stocks are set up in a manner that I like.

There is an old saying that the market always does its best to frustrate the most people. It definitely had been killing the bears lately, but it has not so easy on the bulls either. Of course, you won't hear that much from the big egos that populate the media, but if you talk with the average trader, most will admit that navigating this sort of action presents some major challenges.

A euphoric response to Amazon.com (AMZN) earnings is helping to the keep the tone positive once again. But we have the GDP number and the Federal Open Market Committee (FOMC) interest-rate decision coming up today. The bears will be looking and hoping and praying for a sell-the-news reaction and, frankly, there are quite a few bulls who wouldn't mind to see a little of that as well.

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