Euphoria or not? I don’t know but it’s been fun to watch and listen.
It’s a constant process to synthesize what the market sentiment is and your own echo chamber will make your own perception different than mine. The last 6 weeks have been impressive, you can’t argue that.
Face it, very few people, if anyone anticipated this Trump rally. After this impressive run where does that leave us?
I stay pretty plugged into the market and follow some of the best traders in the world. They are the earliest crowd to warn for caution. Often times their caution is a early and that has been the case with this rally. And every trader knows the feeling of selling too early and being left flabbergasted with how far things can go.
On the other hand, the average Joe is probably just now hearing about how great the markets are doing thanks to media sensationalization – Dow 40,000 anyone? Lord help this group.
So how do you know if we are in euphoria or just the beginning? That’s something no one knows for sure but you can only start to gauge this if you consistently watch the market. I’ll share a few real life examples I have experienced in the last 3 weeks and tell you where I stand.
First, three weeks ago my mother’s friend asked me for a good tech company to invest in because they heard “the market is doing well”. Alarm 1.
Second, a family member proudly informs me that they heard the market is at all time highs and we should buy. Alarm 2.
Third, I overheard a coworker say they have been trailing the market all year so last week they reallocated their 401k to 100% stocks. Alarm 3.
The uptrend is hard to argue with but from my perspective the risk versus reward favors the short side right now. And this is where a lot of people struggle including myself. They weren’t in the rally or weren’t big enough for it. They hear that others are making a killing. And now they press their positions in frustration. This could be Alarm 4.
Know your time frame.
Day traders and swing traders can still be taking long setups since that’s the overall trend.
Position traders should stay focused on long positions but don’t load the boat up here.
Long-term holders need to be patient, a pull back will happen.
Everyone should watch for relative strength. When the overall market is selling off, the stocks with relative strength are usually building the right side of their base. One I will be watching is Zillow ($Z).
This is a Guest Post by @ajwiiiiams where you can find him on Twitter here