The indices and many individual stocks are set for a positive open and a further push into new high territory. It has been a very positive week for the market after shrugging off the drama of the social media short squeeze in a handful of names.
Ironically, the short squeeze helped to produce some corrective action in extended growth stocks that hedge funds favored. This created better technical conditions, and momentum built quite nicely when liquidity flowed back into individual stock picking and out of the short squeezes
Bigger-cap growth stocks have finally stepped up. That was due in part to earnings from Alphabet (GOOGL) , but also the Innovator IBD 50 ETF (FFTY) jumped 2.1% on Thursday. The iShares Russell 2000 ETF (IWM) was up more than 2% as well and remains the star of the show.
The biggest problem the market faces right now is that the very strong action is causing worry that it is too good to last for long. There is a natural inclination toward contrary thinking by many market participants. When stocks and indices hit new highs, they worry that it can't last and that we are on the verge of a collapse.
The key to this market is not the state of the indices. The key is the state of the stock picking. It is when the stock picking undergoes a shift in character that we will need to ramp up caution levels.
It is your profit-and-loss statement that is the best timing device. Rather than focus on the technical conditions of the indices, stay focused on the stocks you are trading. When they stop working and you start losing money, then that will be the time to ramp up your defense.
Market players want to look for some sort of magic formula that will tell them the exact movement they need to be more cautious and worry about a reversal. There isn't any such formula. The only thing we can do is stay vigilant. My style is to keep pushing while others are predicting market tops. My experience is that no one can predict tops with any great degree of certainty, and they end up incurring large opportunity costs while they sit and wait for disaster.
Stocks are indicated higher here on Friday morning as hopes for a stimulus bill gain traction. We have the monthly jobs report coming up, but what is really driving this market is a vision that the economy will reopen as vaccines rollout and economic aid is offered.
The economic optimism and the endless fiscal and monetary support are key, but it is the liquidity possessed by individual traders that is creating the great trading action. That will continue to be my focus. I'll be digging for more setups and plan to trade them aggressively.