Santa’s Here, Now What?

Random Thoughts

I’m not a big fan of so called “seasonals” unless of course, they help my position along. The problem is that you can’t trade them. Yes, there’s a bias when it occurs but it doesn’t always occur. They can be wrong for several years and still be statistically valid.

Yes, in keeping with the season, I have recently poised the question, “will Santa Clause come?” Well, so far so good. The market was in the process of tanking but then turned promptly right back up. So, it does look like Santa is here. These things are fun but I wouldn’t bet my trading stake on them. Do pay attention to price. The “why” does not matter.

The Ps (S&P 500) slid nearly 5% but have since recouped nearly all of those losses. This action puts them within spitting distance of all-time highs. This is why we don’t rush out and sell the farm every time the market has a bit of a spill. And, this is why we wait, and don’t anticipate, sell signals. Yes, do pay attention and honor your stops.

If you try to catch every zig and zag you’ll end up chasing your own tail. You’re better off letting the ebb and flow control your portfolio. If you are not stopped out then you stick with the trend. If you are, then so be it. He who fights and runs away lives to fight another day. On new positions, you wait for entries. It’s that simple. Notice I said the word “simple” and not easy.

The Quack (Nasdaq) has also recouped most of its losses. It too is closing in on new highs—14-year highs here.

The Rusty (IWM) really came back with a vengeance. It looks like it was going to break down out of its short-term trading range but not only turned around, it is now breaking out to the upside out of that range. This action puts it less than 1% away from all-time highs.

I really hate the “it’s the only game in town” argument but I do think that new highs will beget even more new highs. Again though, the “why” does not matter. Follow the price—what is, is.

Speaking of new highs, I received this email on Thursday:

Dave –

I know we love all-time highs, take one day at a time, etc., but this market action does not seem healthy. In your experience looking at markets every day for years, including micro (individual stocks) and macro, do you have any thoughts about what might be coming over the horizon? Continuation of the uptrend, blow-off, event driven-volatility? You must have some thoughts independent and separate from reactively managing the portfolio one day at a time.

Thanks. Robert

Here was my reply:

“As I mention often, in 2007 I began apologizing to clients because all I could find is shorts (even though the market was at new highs). I don’t see that sort of reason to be concerned but yes, watch EVERYTHING and put the pieces together.

So far, this has been one heck of a bear trap…but that doesn’t mean it can’t turn into a bull trap too.

Trail stops and take partial profits just in case.”

He mentioned managing a portfolio. The model portfolio was relatively unscathed during the recent slide. Not all the time, but often, when you start getting whacked (i.e. stopped out) it can be a sign that the longer-term trend is coming to an end. Sometimes though, you’re just in those stock that are defying gravity. So, there’s more to it than that. You look at 1000s of stocks daily, hundreds of sectors and ETFs, and a handful of indices. If the indices are at or near new highs and most sectors/ETFs are at or near new highs and most stocks are trending and/or at or near new highs then the market is healthy. You don’t fight it.

With that said, so far, the market is healthy. The indices are near new highs. Most stocks are at/near new highs and trending. And, most sectors are at/near new highs and trending.

So what do we do? The sharp recovery makes it tough to get into new positions. This is why we use stops on existing ones. Manage what you already have and see if the market can continue to new highs. If it does, take partial profits and trail stops on existing positions and then look to start adding back on the long side. As usual, take things one day at a time.

Best of luck with your trading on Monday!

Dave