Trapped Bears Provide Fuel for Strong Market Support
When it comes to predicting market tops, reaction beats anticipation. Here's one of the main things that could signal that a change in the market is occurring.
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The indexes are flat and breadth is running close to even on Monday morning, but that is a victory for the bulls. The market is refusing to sell off despite more Trump tariff action and some upcoming economic and earnings news.
One of the ironies of the market is that the more that investors anticipate a market turn, the more likely it is that it won’t happen right away. This is the "climbing a wall of worry" syndrome. When there is skepticism about the market, investors hold higher levels of cash. If the market continues to run higher, then the folks on the sidelines start to worry about being left behind, and they will put more cash to work and cover shorts. That buying drives up prices further and causes even more concern about being left behind.
When it comes to predicting market tops, there are two approaches—anticipation and reaction. Anticipatory top-calling is what we see most often. Pundits and experts come up with arguments about why the market is about to reverse. The arguments and logic are always compelling. The problem is that there is no way to know when those negatives will start to matter. Just because the market is expensive or the economy is slowing, doesn’t mean that the market is going to react when you think it will. In fact, it is very likely to keep running because of the climb the wall of worry syndrome.
I am firmly in the "reactive" camp when it comes to market timing. I want to stay with the market strength until it clearly ends. I don’t care about nailing the exact top, which is typically the goal of anticipatory timers. I’m more concerned about identifying a clear change in market character that will lead to corrective action.
One of the main things I look for to signal that a change in the market is occurring is an intraday reversal to the downside and a weak close. When the buying energy is expended intraday and a reversal occurs, it is a signal for weak holders to increase their profit taking.
This market has had very consistent intraday strength and strong closes since the bottom in April. When that changes then it is likely to lead to some deeper corrective action. I don’t know what will trigger that but stay focused on the price action rather than the news headlines.
I have been very inactive lately as I’m letting my best stocks ride the momentum. Entry points for new buys are very tough, but I want to hold on to those names that are still pushing higher.
One small name I added today is Ondas Holdings ONDS, which is a maker of drones and has had a number of recent contract wins.
At the time of publication, Rev Shark was long ONDS.
Please note that due to factors including low market capitalization and/or insufficient public float, we consider ONDS to be a small-cap stock. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.
