The Market Continues To Climb The Wall Of Worry

Since March 9th, markets have rallied substantially and many people have been left behind.  There’s been everything wrong with this rally, except oh yeah, it’s made us a good chunk of money.  There are plenty of investors that are still down on the year because they owned too many stocks in the first two months of the year and never participated in the rally.  Since March 9th, I’ve heard so many people say they will buy the dip or buy when it gets to Dow XXXX.  That attitude is what’s fueling the rally.  I’ve said it on television several times in the past few weeks.  Good stock markets don’t let you in.  That appears to be what’s happening right now.  The more people doubt a rally and complain about it, the more people there are there are yet to be converted.  If those people are complaining about it, then they aren’t in. 

We’ve talked about the “Gap Trade” for several weeks.  That was the name I gave the opportunity that was ahead of us.  It was fundamentals improving and the technicals languishing behind creating a gap that we could eventually profit from.  The one thing we didn’t know was how wide the gap was going to get.  Perhaps we got our answer.  We had a 10% correction coming into earnings season and earnings haven’t disappointed.  Therefore, stocks have rebounded.  Now, the rally hasn’t been perfect.  The internals have stunk for most of the time.  But, not all of them.  And, to be honest, it hasn’t mattered.  This may be a situation where there is an adjustment going on where investors are realizing some of the risks from months past are gone and stocks deserve a higher price.  That adjustment sometimes doesn’t show up in ideal technicals all the time.  So, how do we play it?

As you know, we’ve made good money this year and when the market was rolling over, we didn’t want to take anything for granted.  Therefore, we protected profits, built some short positions, and built a lot of cash, in addition to keeping some long positions.  The risks rose and we took cover.  Now, the rally may be resuming.  But, because the internals of the market aren’t the greatest, we have to proceed with caution and gradually get more long at strategic times.  In addition, this is where pairs trades comes in handy.  You can short weak areas and go long strong areas to give yourself more exposure without over committing.  It’s possible the stock market could continue to drift up another 10%.  But, given that the Nasdaq is up 9 straight days, I would expect a pullback soon.  If it’s a weak pullback, that will be the time to get more allocated.

I would say the market isn’t climbing the wall of worry so much as it is the wall of doubt.  Any way you slice it, the market is being very persistant.

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