The stock market uptrend that began in February is the most persistent stock index trend in some time. It seems that every attempt at a pullback, or even a slowdown is met by anxious buyers wanting to jump on the bandwagon. I haven’t had much different to say since my last blog post, but thought I had better say something or my daily comment will have gone to a weekly comment and on its way to becomming a monthly comment. I do intend to post more frequently but I’ve had many demands on my time lately, and since this market has basically had only one direction there has been little to say. Of course I could rely on my usual rants against the obama administration, but again, it is just more of the same. I hope November brings a change we can really believe in. I still think that prospect is one ingredient helping this rally along. Perhaps a larger ingredient is that trend following models will jump on trends for the sake of the trend. A trend can exists for the sake of the trend as long as traders keep piling on the bandwagon. Fundamentals can get put on hold until the music suddenly stops. I find quite a disconnect between this market rally and the financial and political backdrop. Certainly interest rates being low leaves little else to trade if one is seeking a rate of return. But every knows that near zero interest rates coupled with reckless spending is unsustainable. But then again there is no edge in what everyone knows.
Certainly trend follows are being paid well. Those who believe in reversion to the mean are not having as good a time. Trend follows rely on catching the outlier move, such as the move we are experiencing. Many other markets, especially in the hot commodity arena, have had similar moves over the past few years, and they all experienced rapid and steep declines when the trends became one-directional. Trend followers can get whipsawed for a very long time when a market does what it normally does the vast majority of the time. These outlier moves are needed by trend followers to recoup the many trading losses incurred during more normal times. When a market is trending but still experiencing corrections along the way the market is in a much more healthy position in my opinion. I prefer markets that swing in both directions, but I also have learned through experience to stay out of the way of a freight train. I do have trouble jumping on board a fast moving freight train. The general public seems to want to jump on board when it is running fast and out of control.
One of the indicators that I’ve talked about many times on this blog is the adaptive CCI, which you can see in the sub-graph of the chart above of the IWM. (IWM is the etf for the Russell 2000.) I use it to gauge the trendiness of the market. It was designed to signal a long or short position when it is above or below the plus or minus 100 line, which is drawn with the dashed cyan lines. It is rarely used today in that manner, but that was the concept. You can see on the above chart that this indicator has been basically above the plus 100 line almost since this rally began. When this condition persists I don’t want to fight the trend. Of course the trend could abruptly reverse without warning. But trying to play for a reversal with techniques such as stochastic divergences will usually result in losses as long as the trend is so powerful. Of course a divergence will usually work at some point and call the top of the move. But there could be many divergences preceding the one that finally works that will result in many losses. This trend will eventually run out of fuel, and once it does rallies can be sold as they bump up against a declining trend, but as long as the trend is up I will try to resist temptation to short this market. No guarantees. It is very tempting to take a stab at a reversal. The action today looks a bit like an upthrust in some of the indexes and certain stocks. In a more normal market that might inspire some selling. But as long as buyers, that is funds, with lots of cash look for every downtick to pounce on the long side of this market, one may as well throw out the technicals. A correction, or even a collapse, could come at any moment, without warning, without a reason, and without any technical indication. Well, maybe this time is different. Maybe obama has outlawed the downside of markets for the rest of time and this market will actually climb to the moon. That’s what buyers must be thinking, that is if they are thinking. But their trading models don’t think, they just climb on board the trends, and those trading models work out occasionally – on the outliers.