Despite another night of riots and unrest around the county, stocks are set to open sharply higher yet again. Market participants continue to look beyond the Covid-19 crisis and the social unrest, and are optimistic about a sharp and sustained economic recovery.
Although the bears are confident that the market is wrong about how easily the economy will recover, they cannot overcome the trillions of dollars that the Fed is using to move the market higher. The pessimistic argument is that this liquidity can not fix all the problems that exist, the market doesn't seem to be too worried about that this point.
What we have had for weeks now is a battle between a very logical and compelling negative narrative and positive price action. The longer the positive price action persists, the more it draws in skeptics that are growing frustrated at a market that won't pull back. They may not believe in the reasons why this market is going up, but they don't want to be left out even it if is highly illogical behavior.
My message continues to be that it is far better to focus on the price action rather than try to formulate some sort of argument as to why it can't continue. As I discussed yesterday, the market can remain irrational longer than you can remain solvent.
Our job isn't to tell the market what to do. Our job is to navigate what it is doing. We are never going to win a debate with the market beast. The beast is the boss and we have to take what she offers us.
If you are looking for some clues that the price action is shifting, there are a number of things to watch.
- Rotations between sectors
- Leading stocks and the number of new highs
- Pockets of speculation in small-caps
- Intraday reversals of stocks and indices.
- Weak closes
Those are the issues that will provide evidence that the action is shifting. Don't anticipate, but react when those conditions start to develop.
For now, I'm sticking with some individual stock picking and will focus on trying to find the hot pockets of speculative action.