Rev's Forum: The Ignorant Crowd Is Right Most of the Time

 | Feb 15, 2017 | 7:31 AM EST
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"Crowds don't think; they act; they don't produce ideas, they produce actions."

--Mehmet Murat ildan 

Janet Yellen is receiving the credit for positive action around the world. Her somewhat hawkish comments in congressional testimony yesterday boosted financials that like the idea of higher interest rates and a steeper yield curve.

For years the bears have been convinced that it would be hawkish central banks and higher interest rates that eventually would kill this long-running market uptrend, but it isn't working that way. While inflation is starting to show up in places, there is enough economic growth to prevent "stagflation," which is the real market drama.

Also, to the consternation of the bears, markets are still quite optimistic about the potential for some pro-growth fiscal policies from Donald Trump. The shrill cries in the media about damaging trade policies are being ignored and the concerns about an "America First" policy are having no market impact.

Some market timers were looking for a hawkish Janet Yellen to be a catalyst for a market turn, but that did not occur probably because there were too many folks hoping for such action. It isn't the poorly positioned bears that are praying for some downside, but the bulls are having a difficult time putting new cash to work as overbought conditions spread to nearly everything in the market.

The action in the market recently has been a classic example of how technical analysis is supposed to work. The S&P 500 formed a long base of support starting on Dec. 13, 2016. It made a couple tries at an upside break that fizzled out, but then on Feb. 9 it blasted through resistance to a new high. Subsequently momentum stayed strong and there have been three straight days of upside follow-through.

It is almost too perfect to work that well, but sometimes the obvious attracts the crowd and it helps to make it self-fulfilling. The bears like to believe that the crowd of market players is unthinking and overly emotional, but the truth is that the crowd is right about the market the vast majority of times. It is tripped up at extreme points, but the way to make money in a market like this is to run with the herd rather than question its intelligence.

Early indications are for a flat open this morning, but that doesn't seem to be much of a problem lately. The S&P 500 only has had one close near the lows so far in 2017. The market consistently has closed in the upper end of the daily range, which often is attributed to so-called "smart money."

The market presents a bit of a dilemma for us here. There is no question that momentum is strong, but many things are now extended and need to consolidate. That was the case yesterday also, but many traders were caught by surprised when stocks extended higher yet again. Some flattish action would be ideal at this point, but the underinvested bulls and dip buyers don't want to wait for that to happen. The bears were squeezed badly yesterday and they may be capitulating as the market ignores any and all negative arguments.

I've been a net seller into the recent strength due to my trading methodology, but I'm a buyer if I can find setups I like. I'm tuning out all the market timers and staying focused on action in individual stocks.

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