"The least movement is of importance to all nature. The entire ocean is affected by a pebble."
-- Blaise Pascal
In order to navigate the market effectively we need to understand its character. What is the nature of the action and what is the best strategy to protect and grow our precious capital?
The current market has four main themes, all of which are interrelated. They have been in place for a while now, but are undergoing gradual changes that we have to watch carefully. Sooner or later, a trend will emerge. If we identify it early our opportunity for profits increases dramatically.
The first, and most obvious, theme is that the market is in a trading range. We have had three such ranges since July 14 following the very strong Brexit rally. Since that time, we have had just two moves of any size that produced new trading ranges rather than trends.
The length and tightness of these trading ranges is unusual and has set some records. That has made things extremely difficult for some market timers who have been anticipating a major trend change for months. Those that have built large positions in anticipation of a major move have been disappointed and frustrated.
The second theme in the market is that news is not having any lasting impact. There has been quite a bit of economic news, Brexit continues to be an issue, oil production deals are in the works, China has many issues and the Fed is constantly in the headlines as it hints at rate hikes.
None of these big macro news stories is having any lasting impact. One day the market celebrates one story and then the next day it focuses on something disappointing. Nothing is having any lasting impact. We aren't seeing the hawkish Fed matter for long and we aren't seeing any economic news have any lasting impact. We just fall back into the trading range as each story is digested.
The third theme in play now is that the intraday price action has shifted. For an extremely long time, we had tenacious dip buying. Quite often, dip buyers were so anxious they would jump in on a minor pause. This inclination led to V-shaped moves and there was a tendency for strong closes.
Recently we've had a greater inclination for strength to be sold. So far in 12 trading sessions in October we have closed lower than we opened seven times, with four of those intraday reversals to the downside being quite sizable. We have not had any sizable intraday rallies. It is change in price movement that keeps the indices pinned in a trading range and has negative connotations.
This poor intraday action leads to the fourth and most notable theme. Individual stock picking is more difficult. Trading ranges are often quite good for stock picking. There are often some good pockets of speculative action, even when the indices are doing nothing. Traders gravitate toward the action and that movement offers some good opportunities.
Back in July and August the trading range action offered some great stock picking. Names like Acacia Communications (ACIA) and TPI Composites (TPIC) , which I covered extensively, exploded higher and offered some great trades. With some digging, it was possible to find some good action even as the pundits talked about the record setting flatness of the indices.
Those pockets of great stock picking have dried up. A big part of that is the change in the intraday action discussed above. There just aren't pocket of sustained momentum like there were a few months back.
That is the nature of the market at times. The level of opportunity will vary quite a bit and will have no real correlation to the movement in the indices.
So how do we deal with this? The key to success in the market is the same as it has always been. We just keep plugging along. We slog away day after day, looking for trades and managing our positions. At some point, the market will reward our efforts again. We don't know when that will be, but it will eventually occur. We just have to make sure we don't give up. Keep on digging for opportunity and it will pay off.
In the early going the indices are around flat. Earnings reports last night were not very good especially Intel (INTC) . Oil is up and Chinese economic news is not producing much response.
If the recent pattern holds, we are due for some downside today, which will just keep us stuck in the trading range even longer.