Small-caps had another great day on Tuesday as the Russell 2000 raced to a new all-time high. Big-cap technology names in the Nasdaq 100 lagged, but overall, breadth was good and there were nearly 1,000 stocks hitting fresh all-time highs.
When the market is running this hot and becoming technically extended, it is very easy to overcomplicate things as we look for an edge. It can feel quite foolish to keep chasing stocks that have gone parabolic and don't appear to have the fundamentals to support their valuation, so there is a temptation to look for some sort of alternative approach. The problem is that there isn't any good alternative.
We can try to guess when this momentum ends, but that is impossible, and the pain of fighting this action is tremendous. While everyone knows that the action won't last forever, sitting on the wrong side of it for very long carries very high actual cost as well as opportunity cost.
The thing that works in this market is to stick with momentum in the best sectors. It isn't rocket science. Find the sectors, such as special purpose acquisition companies (SPACs), electric vehicles, solar energy and cannabis, that are working and trade them aggressively. When they stop working, sell them and move on.
While the approach is obvious, finding and executing the right trades is still very challenging as things are moving quickly. This is a market with crazy strong momentum, and there is a good case for calling certain sectors a bubble.
George Soros once said, "When I see a bubble forming, I rush in to buy." That seems like common sense, but if you read the commentary of various market pundits they are full of warnings about how this action won't last, and when the end does come it will be as ugly as sin. They are right, but that isn't today's business. Today's business is to extract from this market as much profit as you possibly can.
There is some minor softness in the early going, but there are also some stocks gaping up on strong momentum. As I keep saying, this is a market for stock pickers, not market timers. We need to watch for highly correlated selling, but the key to making money right now is to stick with the group of stocks that so many small traders are gravitating toward.
Once again, my game plan is to manage my existing positions closely by taking some partial profits into strength and not to let any big losses develop. I keep hunting for new setups and new opportunities. My ability to find new buys will determine my market exposure. My cash levels are increasing as I lock in more profits and have a harder time finding new buys.
Don't overthink this market. Just keep doing what is working until it stops working.