Morning Market Thoughts
Good morning. Once again, we are on track for a very positive open, with the Dow futures up more than 150 points. This is a big rally and we’ve got to let our positions run. This can be tricky right now because of yesterday’s dramatic gap above the trading range that’s dominated the market for the past 4 weeks. Caterpillar (CAT) absolutely crushed its estimates this morning. DuPont (DD) beat the street. and 3M (MMM) is down a bit, despite beating earnings estimates. McDonalds (MCD) — posted Big Mac-sized earnings and is up substantially.So, as we’re seeing yesterday and likely today, these post-earnings gaps are holding up. In the preceding weeks, gaps would tend to be sold into, and they’d fail. That’s always a sign of a heavy market, where traders view any sign of strength as an opportunity to sell. But when stocks gap up and hold, the underlying dynamic is different. Now, there are momentum-oriented traders in the market, and they’re buying in anticipation of even higher prices.
So the market is, at least yesterday and today, quite strong. Tomorrow will be the third day of strength — and remember the 3 Day Rule. If you’re the guy buying on the third day, you aren’t exactly at the front of the pack. It’s likely that you’re just eating the dust of faster/smarter traders before you.
The sudden strength of the market is not something that anyone could have predicted — you can guess, but you never know for sure whether the next move will be higher. But you can react to the move when you see it, and the quicker the better.
Again, don’t be holding losing positions. I like to have cash on the sidelines so that I can be opportunistic. I also like to make sure that I avoid being a sold-out bull, where I know the market is going higher, but I’ve sold all my positions to book profits. The way I avoid that frustrating scenario is to watch my trades more closely. And if I’m changing my assessment of the market, from more cautious to more aggressive, I resolve to be very vigilant. Because a steep market can trip up and reverse at any time, I am very focused on any stock that I have added to. If I make another purchase of shares on a stock that I’m already profitable in, then that stock gets a lot more attention. I’ll trade around it, always looking at how much risk I am exposed to.
And I accept the fact that, in hindsight, I could have made more than I did. I could have gone “all in”, and then had an amazing run because I would have known when to liquidate everything. The perfect roller coaster ride. Ride it all the way up, and then hop off just before the coaster falls down the other side. Nice to be king. Unfortunately, that’s not the way it works out.
But as you look at this market, you should be seeing that the “heaviness” that was pretty pervasive these last couple of weeks is no longer as prevalent. So I’m saying that the “conditions of the market have changed.” No longer is this a “sell into strength”. Now we are back to “buy a strong stock when it lets you in (minor pullback that finds support slightly below the last high), and then ride it higher, watching closely.” Adjusting your market/trading outlook is very important as new developments come in. That’s what winners do. They see new information, and they base their actions and outlook on that new information. This approach is much more profitable than the approach of just sticking to your opinion even in the face of conflicting evidence. That’s just being stubborn. And nobody ever made much money being stubborn…and a LOT of people have lost a lot of money being stubborn.
Have a great day!
–Dan
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