"The worse thing you can do in a fight is stop moving. When someone attacks, they create force, movement, momentum, but you'll be okay as long as you can see and feel the direction of that force and travel with it."
-- Victoria Schwab
IBM (IBM) and American Express (AXP) posted results that disappointed last night, the Senate has been unable to agree on a spending bill to prevent a government shutdown, bond yields are hitting the highest levels since 2014 and the dollar is at its lowest levels since 2014. It sounds like a recipe for a market pullback, especially since the indices are technically extended, but the early indications are for a positive open.
This inconsistent action can be explained in one word: momentum. Momentum is the most powerful force in the market. It rolls over all negative news, laughs at overbought conditions and sneers at the bears. Those that underestimate it pay a hefty price.
Momentum won't last forever but those that think they can time it fail to understand its nature. Momentum has no sense of proportion or reasonableness. Momentum feeds on the belief that it has gone too far and lasted too long. It tends to gain strength when you doubt it.
Momentum doesn't need much justification. Fear of being left out is one of its prime components and, right now, optimism about the upcoming earnings season is providing an excellent argument for unrelenting gains. Valuation arguments are meaningless when expectations are still building.
Momentum doesn't create great joy among market players. It creates fear. Fear of not being part of the party. Fear of underperforming. Fear of not making enough money. Momentum crushes the souls of the market timers that try to fight it, as it ignores their compelling and well-reasoned arguments.
How do we deal with a beast like momentum? We celebrate it and honor it and stand by its side as long as possible. There will come a day when the beast will turn and show us that it can run in the opposite direction just as well. Momentum has no loyalty and we can't trust him to run forever but trying to guess when he will turn is useless. We have to stick with it as long as possible or stand on the sidelines and watch in silent awe.
All of the technical and fundamental arguments for why this market should reverse soon are still in place and are even stronger after some poor earnings results. What the bears lack is the price action that will confirm their arguments. Momentum controls this market and that is all the matters.