After two days of slower action, the indices are looking ready to run again. There are the usual headlines trying to come up with explanations for the buying, but at its core what is driving the market is liquidity. There is plenty of cash out there still looking for a place to go and when that is combined with anxiety over underperforming it creates persistent underlying support.
Another factor at work is positive sentiment. Despite increases in Covid-19 cases and concerns about the pace of the economic recovery, there is a positive mood in the market. Many folks are quite pleased that the recovery off the March lows has been quite simple and has proven the pessimists and skeptics very wrong. Continued warnings that another substantial drop in the market is on the way look more like wishful thinking than anything else.
Another element driving positive sentiment is the small-cap trading by individual investors. This has been widely attributed to new investors using the Robinhood app, but the action in these stocks quickly attracts more professional traders who don't want to miss out on any opportunities.
Ironically, the success of day traders with a few thousand dollars in their accounts creates pressure on multibillion-dollar hedge funds to produce better performance. Maybe these amateur traders are just lucky, but in the world of investing it is results that matter regardless of how they are produced.
It is quadruple witching here on Friday, which means options and futures on both individual stocks and indices are expiring. Due to hedging and increased volatility over the past three months, there is going to be a much higher level of action that is typical and that will create some random action.
Many traders will be focused on "pinning" action today, which is the inclination of stocks to move toward option strike prices as the holders of expiring options battle back and forth. Look for stocks to gravitate toward some round numbers.
The option action today will undermine any attempt at market timing. It is nearly impossible to predict when the market trend may end and it is even harder when the focus is on the closing prices for option prices.
Another factor that will be of interest in the next week is the rebalancing of the Russell indices. There will be higher volume than usual in many small-caps as preparations are made for the rebalancing at the close one week from today. This is typically one of the highest volume days of the year and there will be movement in many of the new additions as brokers accumulate shares to be transferred into the indices.
My focus will be on trading individual stocks. I plan on ignoring the tiresome market timers while trying to make some money by focusing on good trading opportunities.