Market participants have a tendency toward black-and-white thinking. They are either bullish or bearish and struggle when the market is in a grey area. They are confused by a market that can't make up its mind.
The market currently is in a grey area as technical conditions suggest that a pullback would be the path of least resistance but hopes of a trade deal with China prevent aggressive selling. The bears are afraid to press their bets because positive trade headlines could hit at any time and the bulls are feeling tired after an extended run.
The net result is action like we had Tuesday, with the indices pinned in a narrow range but with outperformance by small-caps as speculative bulls look for opportunities in individual stocks. I've been writing for the past week or so that this has been a market for stock picking rather than directional trades, which continues to be the case.
If the potential for positive news on trade with China was not out there I'd expect to see much more aggressive selling, but the bears consistently are burned when they try to press. Twice last week the market caught many pessimists leaning the wrong way and that helped to produce sharp spikes higher.
Fear is always the main driving force in the market. Either fear or losses or fear of missing out is what drives the action. Right now there is far more fear of not catching a celebration of progress on China.
The way to deal with a market like this is to focus on trades in individual stocks and not become caught up in predictions about what the indices might do. I'm working hard to manage positions and to avoid giving back losses, but I'm not going to rush to sell things just because the bears keep growling about how the market is going to fall apart.
At some point there will be some significant news on China and it should create some very interesting volatility, but it is a mistake to try to guess how that will play out at this point. We could see a substantial positive response on positive news but also an aggressive "sell the news" reaction. It all will depend on the conditions that exist when the news finally hits.
We are trapped in a grey market now with trading range action. It would be healthier if there was actually some downside, but the news fear will prevent that. Keep an eye on the indices but focus on stock picking and keeping your portfolio near its highs.
