The S&P 500 is set to gap up at the open for the second day in a row. This follows a run of six straight gap-up opens that ended last Wednesday. There isn't any particular news that is driving the strength, other than general optimism about reopening the economy and further strength in crude oil.
One of the fundamental beliefs about markets is that they move on the emotions of fear and greed. It is the constant battle between fear of loss and fear of not making money that is typically the root cause of market movement. Those human emotions are impacted by outside forces at times, but they are always lingering to some degree under the surface.
What makes the current market so challenging for many market participants is that 'fear' and 'greed' are not operating in a way that seems logical to most people. The bulls shrug and say it is because of the Fed and the massive $10 trillion that is being pumped into the economy. The rational fears about the economy that would tend to exist have been offset by financial engineering.
It is a simple explanation for a complex situation, but it gives the price action an irrational feeling. Technical patterns and fundamental considerations don't matter when the only real issue that matters is liquidity. As long as there is this great wave of cash sloshing around, then why should anything else matter?
When fear and greed don't matter and the Fed is at the heart of all market movement, then it renders all stock picking as just random action with an upside bias. Why bother to trying to pick stocks when they don't move to any great extent on their individual merits. Of course, there are always the know-it-all pundits that will try to tell us that they have some special insight about the market -- but they really don't. All that really matters is where the liquidity may flow on any particular day.
Fear and greed will never go away completely. When the flow of liquidity slows for some reason, then we will see normal human emotions emerge again. That is what happened last week when the frothy action abruptly ended and there suddenly were concerns about how easily central banks can keep driving the market.
The outside forces acting on greed and fear make this an unusually difficult market to navigate, which is why it is more important than usual to stay reactive and forego the pompous predictions. There is some tremendous fear out there and it has been co-opted by outside forces that are going to vary in intensity.
If we recognize the forces that are moving this market, we can better navigate it. But it won't be easy when psychology is largely a product of the central banks.
