"If a window of opportunity appears, don't pull down the shade."
A confluence of events has helped to generate strong market momentum recently, but with volatility increasing as the indices make new highs the risk of a pause or some consolidation is increasing.
The thing that is most important at this point is not to confuse a pause in the price action with a market top. Markets that are this strong don't just suddenly collapse and go straight down. That is especially so when we have positive seasonality into the end of the year.
For those who are trying to make negative arguments about the market there are a number of factors upon which they are focused. First is that the tax bill is almost finished now and should be signed any day. It is a classic "sell the news" situation in view of how often the market has rallied on the same news.
Another potential negative is the froth generated by the bitcoin frenzy. This sort of speculative action has become so overheated that we have had stocks such as Longfin Corp. (LFIN) trade in a range of $35 to $143 in a single day and the CEO himself admitting the market cap is not justified. The potential for sharp corrections in other groups in the sector is quite high as many do not have the fundamentals to justify the trading action.
The bitcoin frenzy likely will last far longer than the skeptics believe, but that doesn't mean there won't be intense volatility along the way. The sector has made for some of the best trading in years, but don't become a true believer who ignores the high level of risk in those stocks. Trade them, don't invest in them.
While the major indices look likely to rest a bit, that may be a good thing for stock pickers. We are in an ideal time of the year for speculative trading in small-caps. As I've discussed previously, small-caps tend to outperform into the end of the year and the bitcoin frenzy has helped to elevate speculative trading overall. There are many stocks offering good opportunities now for the aggressive trader. They are short-term trades, but the setups are there and offering potential opportunity.
I believe there is a high likelihood of a sharp drop in the indices before the end of the year but that there will continue to be excellent trading in many small-caps. The indices typically have at least one sharp bout of selling into the end of the year due to repositioning and tax selling. Last year the S&P 500 dropped around 1.3% on the last three days of the year. If we combine that tendency with the potential for a "sell the news" reaction to the tax bill, a dip seems quite likely.
Even if the indices do struggle a bit, traders should continue to drive good action in certain segments of the market. Bitcoin has lit up speculative interest and that should persist even if the indices do pause.
Momentum always lasts longer than many people think it will, and that is definitely the case with current small-cap action.