After soft action and a flurry of pension play selling on the last day of February, the indices are set to gap-up strongly Friday on news that leading index firm, MSCI, will quadruple its weighting of mainland Chinese shares. It is estimated that this will attract about $80 billion in capital into these shares and has boosted the Shanghai 50 index by 2.75% overnight.
In addition to the indexing move, China's PMI numbers came in better than expected although they are still in contraction territory.
These two events caught many market players leaning the wrong way as sluggish trading action the last few days caused a number of players to believe that the market may be on the verge of some corrective action.
This is a good illustration of how difficult it can be to time the twists and turns of the market with any great precision. It doesn't much matter how strong your logic might be ore how astute your technical analysis is. The market will never act in a totally reasonable or predictable way, which is the main reason that it can be so lucrative to navigate it effectively.
Friday's early action is also a reminder of the dangers of being overly anticipatory. Momentum always lasts longer and goes further than seems reasonable. That cuts in both directions. Ironically the fact that we tend to underestimate the power of momentum is one of the reasons that it keeps on going when we think things are due for rest.
One of the strongest dynamics in an uptrending market is the proverbial "Wall of Worry." When skepticism about further upside builds but the market keeps on climbing there is great anxiety about missing out and many market players keep putting capital to work. These incremental buys cause more upside and that results in more anxiety about missing out. The worries about the market help to keep it running higher.
I started a small index position Thursday, which I will stick with for now but my main focus will remain on stock-picking. It is becoming more difficult to find good setups in individual stocks but that is the best source of opportunity. I will continue to hunt for names that have some support and are not terribly extended.
This gap-up open will likely cause a little squeeze and some fear of missing out, although we will have to see how well it holds up. The main driving force for this is structural and that suggests it may have a limited lifespan.
