The Rally That Nobody Trusts

Despite ongoing concerns about Iran, oil, inflation, and economic growth, stocks are on a remarkable run. On Wednesday, the S&P 500 closed above 7000 for the first time since January, and the Nasdaq Composite reached a new all-time high above 24,000 after 11 straight sessions of gains.

President Trump said Wednesday the Iran conflict is "very close to over" and predicted that when the war ends, "the stock market is going to boom, it's already booming." Washington and Tehran are also considering a two-week extension of the ceasefire to allow more time to negotiate.

WTI crude is near $91 Thursday morning and Brent near $95, both well off their peaks.

Earnings Are Holding Up

Earnings season has started with the big banks holding up well. Morgan Stanley (MS) posted earnings per share of $3.43 against estimates of $3.02, with total revenues of $20.6 billion, the first time the firm crossed $20 billion in a single quarter. Bank of America (BAC) posted net income of $8.6 billion with equities trading revenue climbing 30%.

The Federal Reserve's Beige Book, released Wednesday, reported the economy grew at a "slight to modest pace" while describing the Iran war as "a major source of uncertainty" for businesses, but markets are largely looking through that.

Why the Market Is Running

Concern about the Iran situation has eased substantially as it becomes clear that economic pressure is giving Iran little choice but to make a deal. The blockade of the Strait of Hormuz is cutting off what little revenue it was still generating. The U.S. and Israel have hit at least 17,000 targets ranging from factories, infrastructure, government offices, and military facilities. Communication has been so compromised it is making it difficult for leadership to make decisions.

Although Iran's leadership maintains its belligerent stance, it has little choice but to push for further negotiations to address the extreme financial pressure. Market players are aware of this and have essentially declared victory, anticipating a settlement.

Optimism about Iran and the economy, combined with poor positioning and excessive negativity, has driven this powerful rally. Anyone who pays even a little attention is now aware that the indexes are extended and overbought. There is no question that some sort of pullback or consolidation is needed, but the question is how it will happen.

The Overbought Mistake

The biggest mistake many investors make is thinking that overbought readings signal a sudden, sizable drop. That is an understandable fear, but it is unlikely unless there is some surprising negative news. Markets that are this strong don't suddenly reverse and go straight down. They deal with overbought conditions by churning, rotating, and resting. There is a huge crowd of folks who have missed out and they are desperate to buy a lower prices.

The question you should be focusing on isn't whether the indexes will see some downside from here. The question is, what is your trading strategy if there are dips and pullbacks? Rather than try to time a pullback in the indexes, focus on how you will handle individual stock positions that may still have good charts and will see first-quarter earnings reports.

My Game Plan

My current game plan is to stay with the stocks I hold that have improved charts. I may reduce in some cases because I want to be in a position to buy more aggressively as the charts develop. I do want to avoid some earnings risk, but my view is that the Roundhill Magnificent Seven ETF (MAGS) names are setting up for positive responses to their reports, especially if they can rest a bit at this point.

My best advice is to stop worrying about being overbought. That is an easy headline for Wall Street and the pundits. The focus should be on navigating consolidation rather than how much the indexes may drop. Strong markets stay sticky to the upside, and technically, it looks like a new uptrend is underway.

We have a positive but quiet start on Thursday morning.

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