Runaway Market Presents a Conundrum for Disciplined Investors

An extended market became even more extended on Thursday when stronger-than-expected retail sales data and a strong earnings report from Walmart WMT helped to diminish worries about a slowing economy. It was a very energetic move, with both the Nasdaq 100 QQQ and Russell 2000 IWM jumping 2.5% on very strong breadth.

In just two weeks, market sentiment about the economy has completely changed. Worries about economic slowing caused some of the worst corrective action of the year and raised concerns that the Fed had not cut interest rates already. Following some mild economic news, however, the market transformed its views, and now the attitude is that there is a perfect blend of slowing inflation and positive growth.

The strength in the market caught many technical traders by surprise. The indexes had already had a substantial jump and were facing resistance at the 50-day moving average. It was a very strong V-shaped move, and the conventional wisdom is that bounces are not supposed to go straight back up after sharp corrective action has occurred.

Big, straight-up jumps tend to create FOMO. Market participants are disappointed and annoyed that they didn’t put more money to work during the dip and now they are afraid the market will keep running up without them. They chase the strength, which causes more upside and creates even more extended technical conditions.

While the business media and buy-and-hold investors celebrate this action, it presents a difficult dilemma for traders who want to put cash to work but have to chase entry points and buy charts that have poor technical setups. It is great action for existing positions that are enjoying the ride but not so great if you have idle cash that you want to put to work.

The big question now is whether the indexes can keep on running. Markets that are this strong tend to stay sticky to the upside. They do not suddenly collapse unless there are some new and very surprising negative developments. There doesn’t seem to be anything immediate on the horizon that can trip up the market.

Negative seasonality is an issue that still must be considered for the next two months, but ironically, it probably has provided some fuel for this rally as market players who were expecting it were poorly positioned for this level of strength.

My game plan is to keep digging for some new buys but to stay disciplined with my entries and not buy a chart because of fear of being left out. You wouldn’t know it from the media coverage, but this type of market action is extremely difficult for many traders.

We have mild strength in the early going Friday, with some housing data coming up a little later.

More from TheStreet Pro

At the time of publication, Rev Shark had no positions in any securities mentioned.