I don't set trends. I just find out what they are and exploit them. --Dick Clark
After basing with a slight positive bias for eight days, the major indices made a breakout move Thursday. The slow action, a high level of skepticism and poorly positioned market players helped to drive the move. Many folks had been lulled to sleep by the tightest trading range in a while, but it was actually a very favorable setup for the market.
As has the been the case so often in this market, the strength was not the cause for great celebration by many but that is part of the reason we have these moves. If you were caught by surprise or are lamenting that you are underinvested, the key now is not to expect the market to suddenly fall apart.
One of the easiest mistakes market players can make is to keep anticipating the one-day crash. I suspect more money has been lost worrying about a crash than has actually been lost in them.
It is particularly important to keep in mind that big breakdowns almost never occur as the market is hitting new highs. Big downside moves and crashes tend to occur in markets that are already struggling. Markets that are uptrending and hitting highs will hesitate and struggle at times, but they don't just suddenly reverse and go straight down. They stay sticky to the upside for a while.
The lesson is not to rush out and load up on shorts. Don't fight the trend, especially when the market is just starting to break out. The market has a strong tendency to hold up in large part due to underlying support supplied by underinvested bulls that missed some of the move and want to add long exposure.
What adds to the trickiness of the trading right now is how thin and slow the action has been. Volume is downright pitiful, which doesn't mean that the moves aren't valid, but it does make it more difficult to trust momentum to continue. Volume is important because it helps give us confidence about the level of interest. Markets that go up on declining volume just aren't as easy to trust.
One thing the bears are sure to be focusing on is various news stories about how the Fed seems to be backing away from an immediate announcement of further quantitative easing. Goldman Sachs cut its prediction the other day, the WSJ had an article Thursday about Fed hawks, and there is a story this morning that the head of the Minneapolis Fed has concerns that the promise to hold interest rates low into 2014 goes too far.
So far, the diminishing hopes of QE3 have not had any market impact probably because there is still hope of central bank action in Europe, but if we do see a selloff, you can bet that the lack of further QE will be the reason given. If we start to see more talk about that, we'll have to heighten our vigilance.
We are in an uptrend and there are plenty of people who hate it and will help to keep it going. Respect the trend until it gives you a reason not to.