We continue to drift up slowly, which is a sign that market players are still trying to position for further upside. That doesn't mean we will go straight up, but it bodes well for some good underlying dip-buying support should we pull back.
The key to a good end-of-the-year run is that we have less focus on Europe. If we can avoid gaps one way or the other, stock-pickers will come back in droves.
The most difficult aspect of this market recently is that the Investor's Business Daily momentum-style of trading individual stocks just isn't working very well. You've needed to focus on playing the movements in the indices; playing the gaps and fades can be quite rewarding if you are effective in using the leveraged ETFs.
Picking individual stocks has been much more challenging. The big morning gaps and the high correlation among stocks is part of that, but the whole CANSLIM approach advocated by IBD has not performed well. As a consequence, quite a few hedge fund and aggressive momentum players have been lagging.
A momentum style of investing works best when there is a smooth, general uptrend; obvious themes; and good leadership. We have had an uptrend, but it has been macro- and news-driven rather than fundamentally driven by individual stocks. Oil stocks have had some relative strength but the momentum themes have been extremely sparse.
You can always find some good individual action -- like in C&J Energy (CJES) and Silicon Motion (SIMO), which I've discussed recently -- but this has been a very challenging market for the folks who focus on the traditional IBD momentum approach.
So many traders use a momentum approach because when it works, it tends to work very well, and you can rack up some pretty good gains if you play it right. It's often tough for traders with this mindset to turn into contrarians or index traders -- even when it is clear that those approaches are working better.
We'll see if the character of the trading can shift a bit into the end of the year, but the intense focus on Europe will need to abate a bit. If that happens, though, it should be happy holidays for stock-pickers.
