Too Far, Too Fast?

Turning the calendar to 2018 kicked off an exciting run in stocks as the market moved up almost 4% in 9 short trading days. In 8 of those 9 days the market closed higher and the one red day was down a whopping .1%. These euphoric-type moves can’t last forever especially when you consider how far price is from its 200 day moving average. Bullish RSI momentum has reached an extreme as it exceeded its all-time highs in the SP500, ever. When things become so stretched in one direction the markets need to rest and digest the moves, as such it would be normal and health to see a correction or a consolidation at a minimum.

Looking at the SP500 chart, you can see Tuesday gapped higher at the open and eventually closed below its open and down for the day and with large volume. This is clearly a distribution day. A day when the big money made some moves, locking in some profits. Anytime they speak, we need to listen. Keep in mind it was not just the SP500 that acted this was as almost all US and most foreign indexes followed suit.  Tuesdays’ action in stocks, while not surprising, was a warning shot to the possibility of a short term reversal. One could argue that “short term” price movement is only applicable to traders because investors have a much longer time horizon so there is no need to be concerned with them. This is a true statement but I find being prepared for any possible correction helpful to stay the longer-term course.

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In an ordinary market, this gap higher and subsequent fizzle would be a huge red flag and a strong short signal. Unfortunately this is not an ordinary market and normal rules do not apply. We’ve seen poor price action over the last few months, but prices rebounded decisively within days, if not hours. Yesterday’s fizzle is still a significant concern as it usually is a sign of the start of a near-term dip. But without a bearish headline catalyst to drive fear into otherwise confident bulls, I don’t expect this selling to go very far or to dampen bulls’ conviction. If they refuse to sell, then it is much harder for a dip to take hold.  Complacency will eventually get us into trouble, but over the near-term confident owners keep supply tight by refusing to sell every bearish headline and any negative price-action. That said, at some point this unsustainable climb higher will falter. When that occurs is anyone’s guess. There is only so much money willing to chase these record highs even higher and yesterday’s daily reversal suggests we may be getting close to that point, at least over the near-term. One day does not make a trend so we will need to see what sort of follow through, if any, occurs over the next few trading days. If not, it yesterday’s action will just be another bump in the road.

Either way, I don’t trust this market, but because markets can be irrational for longer than we can expect and more importantly it keeps doing the right thing means we stick with it.