Morning Market Thoughts
Good morning. Futures are up substantially this morning and it looks like this breakout has more room to run. Remember the Wall of Worry. The S&P has been carving out a “megaphone” pattern for the past week or so with lower lows and higher highs finally reaching a point where the distance of the price range is more than 8%. That’s a pretty long distance for the bulls to run…and still have enough buying power to keep the pattern alive. It just seems like the bulls are about out of gas and the market will revert back to the mean at any time.This type of mean reversion would do some serious damage to investors who just recently decided that they needed to buy stocks. The last high on June 8th was at 2,122 — 30 points below yesterday’s close. The 50-day moving average is at 2,082 — 70 points below yesterday’s close. So any pullback to either of those key levels would be painful.
And any such pullback would also be a buying opportunity. That’s the way it has been and that’s the way it will be…until that time when it is not.
Look, don’t try to time the market. I’ve been paying attention to the stock market for 20 years and I have seen market timers come and go…and some that just won’t go away. When stocks are moving higher, as they are now, you’ll hear the market timers start calling the top – an impossible feat. Tops are processes. You might get lucky…once! But generally, you’ll keep revising your call until the top is in place. Then you hope that everyone forgets the last 10 market tops you predicted. Don’t do that. (Bottoms are a bit easier to spot because they are often high volume events — a sprint to the bottom where the race ends when the last runner collapses. But a market bottom is irrelevant now because stocks are trending higher, not lower. We’ll save that for another day).
Here’s the bottom line:
1. Focus on holding positions that remain in trend. You can worry about them, but just keep partial stops on the position at various levels so that you are protected. Your concern is the stuff that the Wall of Worry is all about. (And Mexico is not building that wall; you are).
2. Don’t hold too many positions. It’s not necessary. Given the volatility of the market, over-diversification can turn nasty very quick.
3. Have some cash on the sidelines. The megaphone pattern is a dangerous one. It will ultimately be seen, in hindsight, as a big red flag that preceded a significant pullback. But with some cash in your pocket, reasonable position sizes, and stops that protect your profits but are not so tight that you’ll get stopped out during a normal wiggle, you’ll do just fine.
See you in the forum.
–Dan
Darwin Award Nominee: Some guy in upstate New York (name not yet released to protect the reputation of an idiot) was playing pokemon while driving. Not sure whether he caught pokemon, but in the game of driving, the score was Tree 1, Idiot 0. This is an extreme example of why I don’t ride my racing bicycle on the road, and why I am selling my Harley. When idiots like this are allowed to drive, it’s only a matter of time before someone gets killed. And in that unhappy event, hearing the driver say, “Oops. My bad.” just won’t cover the gravity of the situation.
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