Market players are often inclined to black and white thinking. The market is either good or bad, bearish or bullish -- and there isn't much middle ground. Either we load up the long positions or sell everything. The truth almost is always somewhere in the middle. The market will have both positive and negative aspects at work and our job is to sort them out and try to monetize them the best we can.
Currently, market conditions present a classic dilemma. The indices have bee moving up in a near-perfect straight line since October 9. Early indications are that there will be another positive open due to news reports that the United States is considering a reduction in the 15% tariffs that were imposed on $112 billion in Chinese goods in September.
There are very strong indications that Phase One of a China trade deal will be completed soon and that is keeping the positive momentum going. In addition, the better-than-expected jobs news combined with supportive central banks has presented a Goldilocks economic scenario. There is economic growth and no major threat of a recession, but it is uncertain enough to keep the Fed in play.
In an environment of this sort, the best advice can usually be summed up in the very trite statement "the trend is your friend." Momentum has a tendency of lasting longer and continuing further than seems reasonable. Failure to appreciate this dynamic is what causes the market timing bears so much difficulty.
The key to navigating the market at this point is to not confuse healthy consolidation and pullbacks with a top. The bears often have an inclination to overact to market weakness since they have been so fervently hoping for it. At this juncture, there is very likely to be strong dip-buying interest. If support levels start to fall, that will change the dynamics, but currently, there is plenty of room for pullbacks before there will be an impact on overall market character.
As I discussed, I was a net seller on Monday simply as a function of trading discipline. I took profits on some extended stocks, especially those with earnings coming up, but was unable to find much new that I wanted to buy.
The market is healthy, but entry points in individual stocks are difficult and that keeps me from deploying more cash. While I'm bullish, I'd like to see some downside to create new entries -- but that is exactly what all the other dip buyers are thinking as well.
I'm putting some extra effort into identifying new buys and will make some incremental entries even if the setups are not quite ideal. I see no reason to believe that the market is about to form a major top.