Momentum in a market can oftentimes be an awesome spectacle to behold, and we had momentum in spades lately. Over the past two months, stocks across the board have seen a tremendous run off of March lows as short-squeezes and aggressive trading by those looking to ride this current wave have pushed us farther and faster than may seem reasonable.
However, probably one of the most important drivers behind this action has been a heaping helping of performance anxiety. There are undoubtedly scads of money managers out there who are feeling more than a little pressure to make up some of the ground they lost, especially with the S&P 500 crossing into positive territory for the year after begin down more than 25% on a year-to-date basis on March 9th.
In the process, emotions have become quite frothy at times as bursts of panic buying have pushed many areas of the market to extremes. That, in turn, has left the major indices extended to the upside, and currently, most, if not all, market observers and participants who are technically inclined feel that conditions are ripe for some consolidation.
However, even though Thursday’s early morning euphoria on the heels of leaks regarding the results from the bank stress tests (which, along with the monthly jobs report, should be out by the time this hits your inbox), gave way to a much needed round of profit-taking, the tendency for pullbacks and dips to be short-lived continued as we bounced right back on Friday.
Given the magnitude and duration of this recent run, it’s difficult not to listen a little more to the contrarian in us, but the crowd, as the saying goes, is always right, even if they are wrong. It’s also not too hard to at least consider the possibility that we have indeed begun to process of recovery.
Strength in early cyclical industries as well as the recent move in the resource sectors suggests that the feeling that economic conditions will actually begin to improve sooner rather than later is starting to take hold. Just as the breakdown in the financials almost two years ago (has it really been that long?) signaled that there was a big storm brewing, strength in those areas that tend to lead the market higher in periods of recovery may be pointing to better times ahead.
However, while there are signs that the healing process has begun and we’ve had two months of very strong action in the market, we are at a point where this current momentum may have pushed us a little too far, too fast. The difficulty is balancing the undeniable push of momentum with the increasing likelihood of a pullback.
The key, then, is to recognize the action for what it is. Markets can move much farther and much faster than seems reasonable, and when it does, we are presented with an opportunity to make some good money.
We also need to recognize, though, the fact that things can turn on a dime, and as such, we can’t be overly trusting that we will get bailed out. There’s still plenty of technical damage to repair out there, and while we’ve made some very good progress, we’re just not there yet.
In going through the equity-based TSP fund charts, the thing that strikes us the most is the complete lack of proper entry points. Hopefully, we’ll get a better pullback which will help to set up those buy points. We’d prefer to have more of our capital at work right now, but we’ve never been a big proponent of chasing for chasing’s sake, and we’re not going to start now.
The preceding is for educational purposes only. The % allocations are broad based opinions of SharkInvesting.com and are not specific for any individual. Risk tolerance and time horizon may vary and subscribers should consult their personal advisors to develop a plan, custom tailored for their unique situation.
Charts courtesy of TeleChart, www.worden.comcom.