The Old Rules Don't Apply

 | Mar 27, 2012 | 8:59 AM EDT  | Comments
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The young man knows the rules, but the old man knows the exceptions. --Oliver Wendell Holmes

After a big start to the week, we have quiet action this morning as market players try to sort out what is really driving the market. The headlines primarily attributed the strength on Monday to Fed chief Ben Bernanke's hints that further quantitative easing wasn't out of the question; however, much of the action was driven by market players unprepared for further upside. The persistent strength left them no choice but to chase the market again, and that buying fed on itself. Of course, the machines were busy as well, doing what they do so well, which is accentuate a move that is already in place.

What is particularly interesting about this rally is the mood of the market. We don't have much of the normal euphoria that you see when we go straight up. There are plenty of bears, but also a large faction of market players struggling with this one-way action. It isn't that they are negative but they have a difficult time navigating a market that only moves in one direction. It has an unnatural feel to it and puts many active traders at a disadvantage.

The big benefit of trading is that you can produce superior performance by moving in and out of the market as it bounces around. Even within strong trends, there are normally opportunities to buy pullbacks and dips and then sell into strength. In fact, "buy the dips and sell the rips" is the methodology of many traders within strong uptrends.  

What is different about this market is that there haven't been any real dips in a long time. Market players are so weary of being left behind that they don't even wait for the indices to turn red before buying slight weakness, and when we run away, like we did yesterday, they throw discipline aside and chase because they are tired of being left out.

The market simply doesn't trade like it used to before the crash of 2008-2009. It is due to a number of factors, including liquidity created by quantitative easing, increased computerized trading and the hangover of recent economic trauma.

It's easy to complain about the nature of the market action, but it's not very productive. We need to find ways to deal with it and the number one best way to deal with it is to embrace these never-ending uptrends and not fight them. One day they will shift and the market will trend down again, but trying to guess when has been an absolute nightmare for the bears.

The market is technically extended and there are plenty of good reasons why we should pull back a little, but that has been the case for a long time and it has been irrelevant. The important thing is not to use the old rules for navigating this market. The behavior is different now and we need to be aware that what was an aberration in the past, such as continued rallies on declining volume, is now the norm.

It is slow going this morning, but keep in mind that markets at their highs seldom reverse and go straight down. That is especially so when we have end-of-quarter window dressing in the days ahead. We definitely could use a rest after yesterday, but look for the market to stay sticky to the upside.

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