A staple of business journalism is that there is a cause-and-effect relationship between the news headlines and the action of the stock market. It is usually quite simple to find some sort of news explanation to account for whatever the market happens to be doing. That approach to the stock market is not working very well right now.
The news negatives that exist right now are unlike anything most investors have ever seen in their lifetimes. Not only do we have a worldwide pandemic, record unemployment and tremendous economic challenges, but now there is rioting and looting in at least twenty major cities in the U.S.
Any casual observer would assume that the stock market would be struggling due to these events, but the reality is exactly the opposite. Not only is the market holding up, but the interest in buying into the bad news appears to be increasing.
When there is a disconnect between the stock market and the news to this degree, there is usually one rather simple explanation for the action -- supply and demand. There is an ample supply of cash demanding to buy stocks. That cash has few alternatives and the fear of being caught in a selloff has steadily eroded the longer the market holds up in the face of bad news.
The foundation of this optimism is a combination of confidence that the economy will prevail in the long term and that the Federal Reserve will continue to provide nearly unlimited capital. Market players are celebrating the reopening of the economy -- and the rioting and looting that is occurring isn't viewed as something that will have long-term lingering effects.
Ultimately, the Fed receives credit for the market that refuses to go down. Obviously, this can't last forever, and the risk of another economic shock could change the dynamic. But the mantra 'don't fight the Fed' seems to be the only thing that really matters.
When news flow doesn't matter, how do you navigate the stock market? You focus on price action. It is clearly impossible to predict what the market is going to do based on the headlines, so rather than engage in that fruitless task, we should react to the price action as it develops. Until it turns negative, the most productive thing to do is to stay with the trend and look for ways to make money on the long side.
There was some choppy and chaotic rotation last week, but also a surge in small-cap speculation. Those two themes are likely to continue and they both make the indices unreliable as gauges of overall market health.
My game plan is to continue to look for pockets of speculative trading and to manage positions closely. I have no interest in rushing to build longer-term positions. All I want to do right now is stay in tune with the price action and not let the news headlines push me to make bad decisions.
The indices are just slightly negative in the early going, as dip-buyers were extremely anxious to jump on a gap-down opens that never materialized.