The first half of the most unusual year that any of us has ever seen comes to an end here on Tuesday. It can be safely said that no one could have predicted how events unfolded, but there are still many market pundits who are confident they know what will happen next.
My view has been that the predictions are useless and driven by conceit. The better approach is to stay vigilant and react as conditions develop.
To understand why that is a better approach, all you need to do is look at what happened in the first six months of 2020. Those who navigated it best reacted quickly as market conditions changed and then ignored the experts who pretended they could predict the future.
Before we embark on the next step in the market journey, we must deal with the games played by institutions here at the end of the quarter. Pension plans, hedge funds and mutual funds will engage in their usual tinkering in order to paint a better picture of where they stand.
Because there has been such a big jump in equity prices during the second quarter, it is very likely that many big pension funds will reset by reducing equity exposure and increasing exposure to bonds. Some of this rebalancing already has occurred and was accomplished on Friday when there was also a big rebalancing of various indices. There should continue to be some reverberations today as the final adjustments are made.
The thing that has been most notable about the market action recently is the battle between market timers who are intent on calling a short-term top and very aggressive stock pickers who are intent on finding the next hot play. The stock pickers ignore the big-picture concerns of the market timers and it convinces the market timers that their negative view of the market is even more correct.
I've noticed some narrowing in the stock picking action and, after reviewing hundreds of charts last night, I am not seeing as many good setups. The hot trading action is mostly confined to small sectors such as special purpose acquisition companies (aka SPACs) and electric vehicles. We need some new groups to assert themselves to keep this aggressive trading action going. Quite often traders are self-fulfilling when they are looking for hot stocks, so we will see what pops up.
It has been a great run for aggressive traders lately, but the key to success is making sure you hold on to those big gains and keep accounts close to highs. I anticipate playing stronger defense at this point as I look for the pockets of strong trading momentum.
We have a slightly negative start to the day at hand, but be ready for some end-of-the-quarter games.