The S&P 500 is set to gap up this morning and make another new all-time high. Since September, the S&P 500 has had three successive down days just once while there have been dozens of new all-time highs.
Strong uptrends are the nature of the market at times, but in the age of passive investing and algorithms, they have a tendency to be even more lopsided. There is none of that natural ebb and flow that develops when human emotions are in play.
What makes the relentless uptrend even more difficult to navigate is how the market ignores the news flow. Bad news is just a mechanism that creates the opportunity to buy brief dips. It has no lasting consequences.
If this market was driven primarily by human emotions, there is no way it would trend upward so steadily as the second biggest economy in the world is crippled by a fast-spreading coronavirus that officials are struggling to contain. While there are varying views of the economic damage that will be done, there is little question that there will be some ramifications -- but the market blithely dismisses that fact.
The only way to rationally deal with this action is to focus on the technical and price action and forget all the arguments for why the market shouldn't be doing what it is doing. The bulls justify this action on the basis that it is liquidity-driven and is being pushed primarily by central banks. Throw in the computer algorithms and all the money that flows into big baskets of passive stocks offered by ETFs and funds, and there is steady buying power.
The only strategy that makes sense is to embrace the trend and stay with it as long as possible. Anyone that tells you that they know when the action will shift is either deluded or lying.
For longer-term buy-and-hold investors, this is great market action. They need not do anything but sit there and watch their stocks rise. For more active traders and investors, this is extremely challenging. The indices are too extended to buy but too strong to short or sell.
Traders tend to thrive on the ebb and flow of prices. Natural volatility allows for buying weakness and selling strength but in this market, there is no meaningful weakness so if strength is sold there are very few opportunities to rebuy on weakness.
What tends to make this action worse is that the business media cheerleads this action. The attitude is that everyone should be thrilled that the market just goes straight up every day. The reality is that for most active market players, this is extremely challenging market action and it is very difficult to keep pace.
The best thing we can do is to not pretend that we know when the market behavior might shift. Understand it is driven mainly by liquidity, computers and passive investing and that timing those things is not feasible. Just stay focused on the price action and let that be our guide.