Could another peak in equity markets drag you into the market if you aren’t already in?
While recent chatter has many people believing this equity run is either unstoppable or about to crash, the reality is that this is a trading market that is rewarding very disciplined traders. While bullish traders have certainly been able to profit, so have patient and prudent bearish ones. The catch is that profits are much smaller and that most retail traders might be hard pressed to make money after commissions.
Despite geopolitical tensions in Ukraine and Gaza the market has pushed higher. This is also happening in the context of a slower low volatility summer trading season that is usually expected this time of year. The earnings season is underway and that has helped keep broad market indices muted while traders are spending more time and money on individual names. Otherwise there has been no reason to speculate against current market trends.
The rest of the week remains light with economic data and earnings reports with trader favorites like Netflix and Apple having already reported.
Wednesday – Bank of England Rate Policy Meeting Minutes, earnings from Boeing and Facebook; Thursday – US Weekly jobless Claims, Japan Consumer Price Index, earnings from Ford, General Motors, Amazon, Baidu, and Caterpillar; Friday – UK Gross Domestic Product, US Durable Goods Orders, earnings from Exxon Mobil, Pfizer, Twitter, and UPS.
The previous 5 trading days have also showed evidence of a market that is dynamic in its activity but limited in its amplitude.
Let us take a step back and look at a broader view of how the markets have performed so far this year. In terms
We still see some rotation into a mix of high flying retail trader favorites like Green Mountain Coffee and Tesla along with money flow into more steady climbers such as Schlumberger, Wellpoint and Hewlett Packard. However, the upside still eclipses the downside.
With low volatility it has been easy to trade since mistakes are easy to correct and not as costly. However discipline is needed in these conditions. Trades may not occur as frequently as one would expect. and while some pullbacks have happened it is important to note that they are small in magnitude and don’t last very long. Therefore short traders should be careful not to wait for a swift downdraft to close out any positions. As you can see in the graphic below, there are cases where there have been “corrections of at least 5%”. However, tiny pullbacks of 1.3 – 1.5% have been more frequent as of late.
Chart Courtesy of StockCharts.com
With a proper game plan in place, this kind of trade can be successful when done in small amounts. Patience is key here. The US interest rate outlook and geopolitical concerns may have media speaking of imminent corrections larger than 5%. It is certainly a valid idea to either put money to work or even short the market more if it were to occur. However, there is no reason why small amounts of capital can be used in a safer context of these sub 2% moves in the meantime.
For the rest of the week the SPY, S&P 500 ETF can land anywhere between 195.50 and 200.60.
What is important here is avoiding the boredom trap. Don’t trade for the sake of trading. Have a well thought out and tightly controlled game plan if you think you can profit in this environment.
Good luck and trade rationally.