Keep Plugging Away

 | Dec 04, 2012 | 8:12 AM EST
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Successful investing is anticipating the anticipations of others. --John Maynard Keynes

Despite a little weakness yesterday, the market has clearly been anticipating a deal on the fiscal cliff. The main tipoff is that there has been almost no reaction to negative comments lately. House of Representatives Speaker Boehner's comments that there has been no progress at all and President Obama's immediate dismissal of the Republican's counter-proposal resulted in a collective shrug by the market.

Overall, the market has been quite sanguine about a fiscal cliff deal. It is optimistic a deal will be done, but it isn't acting like it is anticipating a major breakthrough. It seems to be pricing in a deal that will avert a crisis but will likely leave many key issues unresolved.

The difficulty for us is that this is producing a market in which the vast majority of stocks are just drifting around rather randomly. There is enough optimism to provide good support, but there is still enough uncertainty and worry to prevent aggressive buying. Thus, we end up with very quiet intraday action and few good trading opportunities.

Typically, the best environment for trading is when emotions are running high. Greed and fear drive stocks up and down and when those emotions aren't very strong, we end up with a market that doesn't move with much conviction.

When the market is muddled in this manner, there are usually still some pockets of trading action. Traders are always looking for opportunities, and when the market isn't producing it, they will usually create some of their own. We've seen a little of this lately with some action in speculative China stocks and a few other small-caps but it has been very limited. There has been very little big-cap momentum with just a small handful of stocks seeing big jumps on increased volume.

It isn't at all uncommon in the last few years for the market to be pinned down by a major macro news event. We seem to always be waiting for some sort of big decision by the Fed, the European Union or politicians. Since the lows nearly four years ago, this market has been mostly macro driven.

In the past I have always had success by respecting the macro action but staying focused on the trading action in individual stocks. As long as you remain disciplined and stick with stocks that are acting well, this has been a good approach to dealing with the type of market that we are seeing right now.

For some reason, this current environment seems to be producing very few opportunities in individual stocks. I'm uncertain about why that is the case. There just isn't the sort of action I'd expect to find under the surface when the indices are acting this way.

Market conditions always eventually change but it's a bit frustrating right now not to have more opportunities. The key to effective trading has always been to keep on plugging away. There will always be times when you feel frustrated and don't make much progress, but it always changes eventually.

This market is exhibiting much optimism about a fiscal cliff deal but is still staying very cautious. It makes for dull trading action but it is probably a good setup for some drama down the road. Just keep on plugging away and stay vigilant.

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volatility is quite low here, and we could see some downsides here in the short term. ...



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