However beautiful the strategy, you should occasionally look at the results. --Winston Churchill
We are wrapping up the first quarter of 2012 and the results were quite impressive. The gains are the largest in quite some time but what has been most notable about the action is its amazing consistency. The S&P 500 was down more than 1% on just a single day and that loss was completely recouped within two days. There have been few rallies over the years that have been as smooth and steady as this one.
What worked this quarter was quickly buying each and every dip in the market. In fact, it often was a good idea to not even wait for things to go negative before you jumped in aggressively. The folks who waited for pullbacks rarely saw them and ended up having to chase the market higher to add long exposure.
The anticipatory bears have been out in full force for practically the whole quarter looking for a top. The laundry list of negatives has been long and impressive but totally irrelevant, which has helped to create a perpetual short squeeze.
Small-caps have been just about flat since the beginning of February while the Nasdaq1100 has steadily trended higher. This preference for bigger caps is a function of the high level of liquidity that still exists. There is plenty of cash sloshing around looking for a place to go and it is easier to put it into an AAPL than dozens of smaller names.
The big question now is whether this lopsided, one-way action continues, or do we finally start seeing choppier, more normal action.
Trading at the end of the quarter and on the first day of a new quarter tends to be very manipulated, so we don't want to read too much into it, but there are a few recent signs that momentum may be slowing.
The recent increase in initial public offerings and the frenzied trading smacks of excessive bullishness, but at the same time we've had a narrowing of leadership with a smaller group of big-cap names driving the indices. The small-caps and many speculative names have been lagging for a while and recently, weakness in oils and commodities has added a little more pressure.
It has consistently been a mistake to react too quickly to signs of weakness as the market has been able to find its footing within a day or two and continued to trend upward. There has been no real technical damage done and we aren't even too extended at this point.
While caution may be warranted and a high level of selection advisable, there is still no reason for overt bearishness. While it is very tempting to keep on looking for a change in market character to develop, there are still only minor signs of problems.
We have a good bounce kicking in this morning, which is probably due in part to end-of-the-quarter pressures. Stay on your toes and be quick with your trades and we'll be in good shape. It remains business as usual at this point.
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