The indices continued to rise on Wednesday as over 700 stocks hit new 12-month highs and very strong breadth. It was typical bull market action that crushed the bears that keep trying to call a market turn but there are some issues that require increased vigilance and preparation for the faster reactions.
The first problem right now is that entry points are becoming increasingly difficult. That is always the case when the Nasdaq has run up six days in a row on strong breadth. The number of stocks that are extended is increasing. In addition, speculative traders have been extremely aggressive. When they do latch on to a fast-moving, low priced stock they move them so quickly that there is little choice but to engage in extreme chasing if you want in. My list of stocks moving over 10% during the day is quite long but I'm growing nervous about chasing some of the moves at this juncture.
The second problem I see is that the reaction to earnings reports last night was generally poor. It is typical 'sell the news' responses after a big run. Two examples are Fastly (FSLY) and Roku (ROKU) . Both have been leaders, both had good reports, and both are substantially lower this morning. There are always a few stocks that have these sorts of responses but the number last night was greater than usual and hit some of the recent leaders.
It is quite easy to use these two issues in combination with bear's arguments about the economy, valuations, and the Covid-19 crisis to craft a thesis of potential disaster but, as we know, that approach to the market has been a loser. We need to stay focused on price action but increase our vigilance and be ready to react faster and more decisively if these fundamental issues start to hit the market in a more systematic way.
For me, the key to navigating this market is the action I see in my individual stocks. If I start losing money, that is a signal to start cutting positions more aggressively. My goal is to keep my accounts as close to highs as possible. I want to protect gains and that means playing very stout defense when stocks show some signs of weakness.
While I am growing a little worried about price action, it is likely that Congress will agree on a stimulus deal that will keep a bid under the market. I suspect that the bears are looking for a 'sell the reaction' to a deal announcement but the process of agreement is very likely to drag out for a while.
There is nothing wrong with this market that can't be fixed with some rest and consolidation. It is important to not be too bearish as that process takes place but tighten up the trade management a bit and be ready for some increased volatility.
