There is nothing constant in this world but inconsistency. --Jonathan Swift
It is often said that the market will always try to frustrate as many people as possible. That has certainly been the case this week as the movement has been downright random. Both bears and bulls have suddenly found themselves on the wrong side of the action and no one seems to be very confident as to what will happen next.
What is most notable about the action is that there really isn't any news to explain it. The media talks about the sequester and Ben Bernanke, but those are just convenient explanations for the movement and not the real causative factors. What really appears to be driving the market is a combination of computerized trading and end-of-the-month positioning.
What is rather ironic is that on Monday many traders were feeling pretty good about the market pullback. It had been anticipated for some time and it made sense that we'd finally had a good bout of profit-taking following a good run since the first of the year. A little corrective action would be downright healthy at this point and allow for new money to come in and old money to make an exit.
A little oversold bounce on Tuesday after the ugly action on Monday also made sense, but the big move back up yesterday really caused surprise and consternation. It caught bears and bulls by surprise and that probably helped feed the move as the computer programs continue to press, which caused short squeezes and chasing.
Once again, it was one of those joyless moves that kills the bears but, more importantly, catches the bulls totally unprepared. Even those with a positive view of the market find it extremely difficult to profit when we have surprising moves like the one yesterday.
The big question is "Now what?" The choppiness of this action has caused great confusion and it is very difficult to apply logic when there is so much inconsistently. The pattern is that strength like the one we had yesterday leads to more strength as bears cover and underinvested longs try to find exposure, but with the difficult news flow and a number of distribution days recently, the foundation of this market is quite wobbly.
My view on Monday was that we had started to undergo a correction. The action yesterday calls that into question but I'm inclined to characterize the action as an aberration caused by computerized trading. I want to see if "real" buyers keep pushing and are able to hold this market up. Typically, it has been a mistake to be too bearish when the market has made a strong move. Follow-through is much more likely than a quick reversal, so I'm not going to be in any rush to try to short strength. On the other hand, making new buys is not easy and I'm going to manage long positions very closely and with tight stops.
This is an extremely confusing market right now and rather than try to anticipate what is going to happen next, we need to respect the price action and be ready to move very fast as it shifts. I'd really prefer to have a strong trend that we can play, but I suspect that choppiness and quick shifts are going to continue in the near term.
Buckle on your trading helmet and fasten your seatbelt, it's going to be a bumpy ride.