"A horse never runs so fast as when he has other horses to catch up and outpace."
Straight up market action would seemingly be cause for great celebration on Wall Street. There are folks in the media that are quite emotional about it. The buy-and-hold crowd is pleased to see it too, but it presents some formidable challenges for active market players.
Obviously, the bears have great difficulty dealing with a market that doesn't listen to any of their arguments, but it is the active traders with a bullish bias that have the most difficulty navigating a market that moves in only one direction.
The dilemma for active traders is that they want to stick with the trend but also maintain discipline. Disciplined traders will harvest profits at some point, and will seek to keep their accounts as close to highs as possible. The problem is that when you do sell it can extremely difficult to jump back in. The market simply doesn't make entry points easy.
Over the last six years or so, one of the most consistent themes has been underinvested bulls. So many folks who are optimistic about the market never seem to be as fully invested as they'd like to be. This has doomed many fund managers to underperformance and has caused a series of joyless rallies. No one is able to keep pace unless they just stay 100% invested at all times.
V-shaped moves produce joyless rallies, but they also create a wall of worry that is self-perpetuating. The great worry is that a market player won't be able to keep pace with the market. The more lopsided the action becomes, the greater that fear. There is no choice but to keep putting more capital at work, even though the technical patterns look extended.
Another consequence of the V-shaped action is that it creates very aggressive dip buyers. So many folks are left behind, they aggressive jump in on the slightest weakness. Many market players refuse to chase, but they will buy minor dips. Big funds are always looking to lower their basis in their holdings, but they have to put idle capital to work, so they jump in quickly and prevent any real downside from developing.
While these V-shaped bounces tend to last far longer than seems reasonable, they do eventually come to an end. The downside can be quite abrupt when the dip buyers finally stand aside, but trying to time when this will occur is tremendously difficult.
My game plan in this sort of action is to try to harvest gains in a methodical fashion and to redeploy capital into better, less extended, technical setups. As the market becomes more and more overbought, I find fewer buys and end up with more cash. That works out well when we have some normal consolidation, but when the market keeps going straight up it is easy to be very underinvested, even though you maintain a bullish bias.
A good example of this approach is my Stock of the Week, Teck Resources (TCK). It moved up nearly 35% since the open on Monday. With a move of that size, I see little choice but to take gains along the way. I sold the last of my shares last night, and now the stock has a downgrade this morning from FBR Capital due to the size of the move.
While that worked out well, the dilemma is what to do with the proceeds from that sale. How do you put that capital back to work when there are so many other stocks that have made outsized moves? I'm not at all alone with this problem, which is why there are so many underinvested bulls that don't celebrate these straight up markets.
We have some minor strength in the early going as oil continues to act well. There is an important earnings report from Action Alerts PLUS portfolio holding Google (GOOGL) tonight, but the bulls still have the momentum and don't want to let it go.