There were two notable aspects to the market action on Thursday. First was the steady recovery all day after a gap-down open on negative news. The second was the outperformance by the Russell 2000, which gained 1% on slightly positive breadth.
It is the price action that needs to be our focus if we are to navigate this market successfully. There is underlying support and there is a focus on individual stock picking, which is why small-caps are doing well.
It is easy to let the headlines distract you from the price action. When there are constant stories about the rise in Covid-19 cases and endless political turmoil, it is easy to forget that many market players are focused on the ongoing economic recovery and are picking out those stocks that are likely to perform well.
So far earnings season largely has been a dud. The main reports have been from the banking sector so far and have been lackluster at best. There have been a few warnings, such as Fastly (FSLY) , but the great bulk of earnings begins next week when companies such as IBM (IBM) , Netflix (NFLX) and Chipotle Mexican Grill (CMG) report. The reaction to these reports will tell us quite a bit about the overall character of the market and the likelihood that we will see sustained upside momentum.
The easiest mistake to make right now is to be overly anticipatory and to keep looking for reasons to support a view that the market is going to collapse suddenly. There is always something in the news that can be viewed as negative and the argument that the market is due for a pullback is ubiquitous.
The thing that is working is a focus on stock picking while carefully managing positions and staying vigilant. It is an environment in which the rules of technical analysis, money management, patience and discipline matter.
What isn't working is speculation about the macro environment. Numerous pundits are trying to predict not only the outcome of the coming election but how the market will react. While it can make for some interesting speculation, it is nearly impossible to trade those predictions coherently until the reactions start to occur. It is very unproductive to miss out on the current action because you are trying to guess what may happen weeks or months from now.
My game plan is to stay focused on stock picking, manage positions aggressively, keep accounts near highs, and not waste time on big-picture predictions. The price action is positive and that is what matters.