Let’s be honest – we are all surprised at the past couple weeks action. I remember mid-October well, everyone, including myself was expecting the weak action to last much longer than it did. Perhaps even dip into correction/bear market territory.
Of course, this did not occur. In fact, the exact opposite did. We went from being down about 10% to recovering all that and more, in a less amount of time. Each day the market went higher and people became more skeptical, thinking that eventually the ‘bounce’ would be just that and the ‘correction’ would continue. Inevitably, this belief led to it’s demise and now the US Equities are sitting right back at where they started – all time highs.
Sentiment is so, so important to markets. It is what drives the trends we analyze each and everyday. Without sentiment and emotion, technical analysis would mean nothing as there would be no ‘stubborn’ beliefs to exploit for monetary gain.
Money managers are under-invested – again. Meaning they will either ‘hope’ for a dip into year end or suck it up and buy stocks, thus creating the ‘V’ shaped rallies even more prevalent and powerful.
The risk going into the end of the year is this:
A blow off higher as people (and managers) on the sidelines realize how under-invested they are and how much they’ve under-performed this calender year.
What you would see if this is going to be the case is the following:
1. Sentiment gets bearish really quickly, on any dip
2. Overbought stays overbought
3. Stocks will rip higher (i.e Biotechs, transportations), leaving little chance to enter with favorable risk to reward
If this is going to occur, the best thing we all can do is remain disciplined and open-minded. There is no reason to alter your strategy solely based off the ‘chance’ of a blow-off into year end.
Be well, be safe, be disciplined.