Don't Underestimate the Power of Positive Momentum
Trying to time a shift in the market's character is tempting. Here's why I wouldn't even dare.
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The pattern of market action for more than two weeks now has been a soft open and then a rally in the afternoon on narrow breadth, with big-cap technology stocks leading. It has been such a consistent pattern that the gulf of performance between the "Magnificent Seven" names of top performers and the rest of the market is hitting historic levels.
But remember: The one great certainty of the stock market is cycles. All trends eventually end, and a new dynamic emerges. The great challenge, however, is trying to time the shift in market character with some degree of precision.
Momentum almost always lasts longer and goes higher than seems reasonable. It feeds on itself and creates powerful emotions that make investors forget the arguments that kept them on the sidelines at lower prices.
Although most of the market is acting poorly, complacency about the indexes and the big-cap technology names is high. According to Bank of America’s Global Fund Manager Survey, managers have been the most bullish since November 2021, and they are only holding cash lows of 4%, which is a three-year low.
Bears often view this high level of bullishness as a contrarian indicator, and given the narrowness of the action, it is even easier to concoct a bearish narrative. But trying to time a significant market turn based on this sort of data is nearly impossible.
My best advice can be summed up very simply: Stay with the trend until it ends. Don’t try to anticipate when market conditions will shift. Wait for them to actually exhibit some signs of a change. As I wrote on Monday night, the extremes in this action have reached absurd levels, but that doesn’t mean that the market is going to suddenly shift.
We have a mildly positive open on the way and some retail data at 8:30 a.m. ET that may see a market reaction. Don’t forget that the market is closed on Wednesday for the Juneteenth holiday.
At the time of publication, DePorre had no position in any security mentioned.
