People often claim to hunger for truth, but seldom like the taste when it's served up. --George R. R. Martin
After a big day Tuesday, the market finds itself in a very familiar position this morning. Once again, we are contemplating a straight up move that caught both bulls and bears by surprise. Since the low in March 2009, I don't know how many times we have seen this happen. It isn't the fact that we have a sustained uptrend that is unusual, but the intensity and lopsidedness of the action. We simply don't pause or pull back at all along the way. If you aren't aggressive about chasing entries, you are left behind.
Before March 2009, we would see action of this sort occasionally but something changed after the 2008-2009 crash. Now this extreme momentum tends to be the norm. What is surprising is that despite having seen it at least a dozen times in the last few years, we still tend to have a large group of people who fight it. The top-callers have been crushed again, but they simply can't help themselves when it comes to trying to predict the top. They trot out all their negative arguments, which are logical and even compelling, but they forget that the market can do a great job of ignoring pessimism for an extended period.
Although I have seen this sort of action and written about it constantly, I still find it difficult to remain a highly invested, steadfast bull during one of these runs. Despite my warnings to readers not to fight the trend, I still find myself selling stocks that I think are extended. Old money management habits of selling down positions as they run too far too fast are a handicap in this market where the whole notion of being "overbought" is irrelevant.
I've often warned about imposing our subjective feeling about what is reasonable on the market. When we start telling ourselves that the market can't possibly continue to do what it has been doing for so long, we will often be proved wrong. The market simply doesn't care about our feelings when it comes to acting in a reasonable manner.
There are three reasons the market acts different now. The first is because of the great psychological and financial damage that has been done to many individuals by the great recession we have gone through. Many have never regained their confidence and they are always skeptical of market strength now.
The second reason is that artificially low interest rates have created a flood of liquidity that has few places to go but into stocks. This money is often undisciplined in the way it enters the market. It is put to work with little regard of the technical conditions of the market.
The third reason, and probably the one that causes the greatest feeling of irrationality, is the continued boom in computerized and algorithmic trading. It is estimated that up to 70% of the volume in the market is a product of the computers. The goal of many of these programs is to manipulate the inclination of normal human beings so it shouldn't be surprising when the market acts in a surprising fashion.
So how do we deal with this change in the market? The most important thing we can do is be aware of how things have changed. Regardless of our preferences and biases, the market structure is different and we can't expect old patterns to work like they once did.
The important thing this morning is to be aware that even if this market is technically extended and you want to predict a top, it has not been a good strategy to fight momentum. We need actual weakness before a bearish posture can pay off.
Common sense may tell us that this market needs a rest but the pattern of behavior since March 2009 tells us not to anticipate it any time soon.
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