There are three powerful words in trading and investing one not only needs to learn, but they are destined to fail if they cannot say them.
I don't know.
Pandemic. Riots. Record unemployment. Economic activity virtually non-existent for weeks and still only at a fraction of where they were five months ago. Leadership all over the map in terms of reactions to the recent tragedy (murder), protests, looting, and riots. This is not a condemnation, nor approval, regarding how certain leaders have reacted, but an observation that the responses have not been unified.
All of this unfolding at the same time yet stocks continue to rise.
The main argument I see is stocks are rising because of the Fed. The underlying put on the market breeds confidence in buying.
I've also seen folks point to stimulus checks and bored people stuck at home. Tack on the lack of sports and casinos to the reason markets are running higher. Gamblers need to get their highs from someplace, so why not stocks?
The Fed may be plausible, but we can't directly prove it. The expanding balance sheet gives us proof there is involvement, but that balance sheet is nowhere near the market cap value added to the markets since the March low.
Stimulus checks? Those numbers were big enough to account for a few days in the market and nothing more. Plus, we know many people needed that money simply to pay bills.
Gamblers? I think we're seeing it in terms of some smaller, high-risk momentum plays, but odds are that class is trading in and out of stock not practicing a buy and hold strategy.
And if we stay with the idea of gamblers, the pockets of hot action I'm seeing, and Rev has commented on as well, are not names that are going to move the large indexes higher. (And if you aren't reading Rev's thoughts right now, you are missing out, especially on trade ideas and how to navigate this market. These small SPACs and gambling plays aren't even accounted for within most indexes. I touched on what I believe is moving those names last week (hint: Greater Fool Theory), but there's a darker side to GFT. There really isn't a reason it exists other than greed. When names are moving because of GFT, there's no logic behind it. When a trader looks at them and asks: what is the real underlying reason for the move. The true answer is: "I don't know."
The problem for a trader when they won't answer a market move with the words, I don't know, is they attempt to apply some logic behind the move. That logic can land you in hot water. For months now, applying the logical conclusion the market shouldn't be moving higher has only led to huge losses. Applying the logic that many of the small esports/gambling names and SPACs don't deserve this valuation has meant missed opportunities or losses.
This doesn't add up to a conclusion that one should blindly buy momentum or buy the market, but if you can't make sense of a move, it may be best to step aside. If you can't answer some questions or some moves with the words I don't know, then you want to reexamine yourself because no one can know everything and not every move has an answer.
Why is the market higher this morning?
Honestly, I don't know. And that has me sitting on my hands a bit.
I've been fortunate with a few of these SPACs move, so I've been able to participate in the market upside using limited exposure. I believe those moves have occurred as of late because of the lack of IPOs. That's my logic, but even with that logic, even those moves are long-in-the-tooth and warrant aggressive profit-taking.
I'm back to the point of high cash positions and patience because I'm struggling to explain the overall market move outside of the Fed. There are enough pockets of huge momentum that one can net potentially big gains on small trades while maintaining a large cash position. Until that changes or until I can have less "I don't knows", it is the strategy I'll maintain.