It Isn't Euphoria; Fear Is What Is Driving This Market Melt-Up

 | Jan 12, 2018 | 6:56 AM EST
  • Comment
  • Print Print
  • Print

"I must not fear. Fear is the mind-killer. Fear is the little death that brings total obliteration. I will face my fear. I will permit it to pass over me and through me. And when it has gone past I will turn the inner eye to see its path. Where the fear has gone there will be nothing. Only I will remain." -- Frank Herbert, "Dune"

The easiest thing for market pundits to do right now is to predict that a market top is about to occur. The fear is reasonable and easy to embrace.

This is an extremely overheated market, and it won't last forever. At some point, there will be an ugly bout of profit-taking that gains momentum and produces some panic. We haven't seen anything like that in a very long time, but it is an essential nature of markets that will eventual occur.

Fear is always the primary emotion that drives the market, and right now that fear is the fear of missing out and not making enough money. This has been the primary dynamic behind the market for a number of years now, and when combined with an endless flood of liquidity, it is a recipe for a market melt-up.

At some point, a day of reckoning will occur. It may be caused by a news event or just growing concern that prices are not supported by valuations. No one knows when it will happen, or what will be the triggering event, but it will occur. It is a certainty, but should that fear drive us to act prematurely?

Our job is to navigate this action as best we can and build our profits. We can step aside out of fear that we will be caught in an ugly turn, or we can keep riding the rocket ship and be ready to hit the eject button when the turn does come.

The way to handle this market depends on your particular style of trading and investing. Fear, in one form or another, is going to drive your decisions. Either fear of missing out, or fear of being caught in a reversal, will determine what you do.

If your primary fear is fear of being caught in a market turn, you are either having to sit on the sidelines and do little, or trying to catch some upside by making select buys and managing them very tightly. The big worry is about risk, and you have to find a way to control it. Cash is the easy answer, but it carries a very high opportunity cost in a straight-up market.

If your primary fear is the fear of missing out, then you have to have your money at work in the best vehicles you can find. The key is that you still must manage the risk. You may not play things as tightly as your bearish buddies that fear a collapse at any moment, but you have to manage positions very tightly, nonetheless.

My game plan for today is:

  1. The right mindset. This market has ridiculous strong momentum. Embrace it and avoid trying to predict a top. If we see a shift in price action, be ready to react fast.
  2. The indices are secondary. Watch for rotational action and stay focused on price action in individual positions. Let them be the guide. Strong speculative action has been the driving force. When it cools off, it will get ugly fast.
  3. Manage positions closely. I have quite a bit of inventory and need to cut losers very fast and lock in some gains in extended names.
  4. Keep looking for new buys to replace positions that are slowing. Market players are aggressively chasing breakouts, so move quickly to catch early entry points.

As I commented yesterday, this market action is so strong and so one-sided, it is making me feel some fear; but, on the other hand, the potential for continued momentum is so high and the number of setups so good, that I also fear missing out.

The only way to effectively deal with this is vigilance, and that is going to require some effort.

We have a gap-up open on the way.

Don't forget we have a three-day weekend coming up, due to the Martin Luther King holiday on Monday.

Columnist Conversations

Barrons.com noted significant insider purchases in the beat-up shares of Newell (NWL). The stock is...
CEO Christian Brickman couldn't resist owning more Sally Beauty Holdings (SBH) when it briefly went below $14 ...
Move over Boca Biff - there is a new sheriff in town...Chance Walker! My conversation with Chance - high abov...
Oil tested its 200-day moving average this week, but the June 18 low of $63.59 a barrel held. As a result, we...

BEST IDEAS

REAL MONEY'S BEST IDEAS

News Breaks

Powered by

COLUMNIST TWEETS

Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data & Company fundamental data provided by FactSet. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by FactSet Digital Solutions Group.


TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

FactSet calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.