The headlines tell us that the market strength is due to optimism about a trade deal with China and the likelihood that a border deal will prevent another government shutdown. Those are easy and simple explanations for why the S&P 500 is now at its highest point in 2019. But this action is more about cash flow and structural reasons than it is about news.
The biggest reason this market has such strong momentum is because it has strong momentum. Buying feeds on itself and creates great pressure on folks that are trying to put money to work and keep pace with benchmark indices.
Yesterday I discussed how the Climbing the Wall of Worry (WOW) dynamic and the Fear of Missing Out (FOMO) tendency is driving the action. Throw in a dose of Buy the Dip (BTD) and we have the recipe for extremely strong action. The positive news flow simple reinforces the tendency that already exists.
The bears response to this sort of action is to drag out the same arguments that they have been making all the way up. The economy is showing signs of weakening, there is unlikely to be any meaningful deal with China, earnings are slowing, stocks are expense, the rally off the December 24 lows has gone too far and too fast and those stupid bulls will never learn.
The formulation of the arguments for why this market should not continue to run higher is simple and easy. There are always very compelling and logical arguments against the prevailing trend. The problem is that the market is not logical and it doesn't listen to arguments. The most powerful force in the stock market is momentum and if you ignore price action it will run you over.
If you want to try to time a turn in this market, you should forget the news headlines and focus on price action. The best tip-off that a change in market character is occurring will be an intraday reversal and a close near the lows of the day. That won't be sufficient to signal a major change in trend but it will be notice that we have to raise our defenses.
Most market players make the mistake of being too anticipatory. They want to time an exact turn rather than wait for some actual evidence that a shift is occurring. They tend to use their judgment as to what is 'reasonable' to predict what the market will do next. The market just doesn't operate on the basis of being reasonable. It is highly emotional and logic has little to do with it.
We have another gap-up open this morning and the headlines tell us that Trump is willing to relent on the March 1 hard deadline on China trade if progress is being made. That is good enough to keep the buyers coming but what is really motivating them is the price action and the fear of not making money rather than the news.