What's Really Driving The Market?

Where are all the quality breakouts?

Over the weekend as I was running my momentum scans I suddenly realized something that has been bothering me all week with regards to fresh breakouts. Within my tradewithZEN stock selection service I primarily focus on stocks that have reacted extremely bullish to recent earnings and fit a certain chart profile that produces a high percentage of outperforming the market over the next 3-6 months. And with a market that is pushing into new territory and reaching 5 year highs one would think my watchlist would be overflowing with candidates, but that just isn't the case.

One such stock I recently added to my focus list on Jan 11 was DK, where it closed at $29.53. Since then it has continued higher and while I don't recommend buying it at this level, I believe it does look attractive on a pullback near the range of $30.75-29.00. One strategy would be buying 1/2 at the upper range and completing your position on the lower range. Anyhow, the point of sharing this chart is to show you what a strong chart looks like at the time of it being added to my watchlist, but not having it be too overbought.

Now let's fast forward to the sort of charts that have dominated my screen this week.

So what is really going on in the markets and why could it be dangerous to traders?

I believe what we are seeing is what amounts to “forced accumulation” of equities by the Federal Reserve and the Government through economic policies, not the free markets being free to determine which stocks deserve to be appreciated by traders who see real value in them.  It's the only excuse I can come up with when I see everything going up vs quality breakouts from sound bases with classic bullish chart patterns. We truly are in an environment where a rising tide floats all boats.

The scary part of this is that when the party does end, (and I'm not suggesting that it's going to end anytime soon) it's going to abruptly end and those who buy at the highs will see losses add up very quickly. Again, I'm not saying that you should sell everything and go hide in a bunker. However you should be an active seller here, locking in gains, and limiting new purchases in some way.

One very easy way to control your positioning into new equities and thus limiting your exposure to a quick correction is to limit your buying to one new position a day. If you find yourself very bullish and you see 5 or 6 positions you really want to enter, just pick one. That way you don't find yourself with a bunch of new positions on the day before a major selloff where you get shaken out with losses only to see the markets turn higher and do exactly what you thought they would.

Bottom Line…

I feel like the latest push to new highs is not reflective of a healthy stock market but it is what it is – a market that keeps going up and it's our job to trade accordingly. Just be sure to have an exit plan in place, and when I say exit plan I mean one that you can execute immediately. No hesitation, no second guessing. Discover what it is you need to see to let you know the market's miracle run is coming to a close and then watch for those signals. And if you don't have one of your own, find someone who does and listen to them.