Why the renewed optimism? The NASDAQ was up more than 1% and pushed to new highs as the Russell 2000 and S&P 500 index both pushed through key resistance levels. Earnings are driving as Citigroup and Ebay lead the way. The push to a new high was driven by the large cap stocks. Banks, tech, telecom and utilities were the leaders on the day.
It is important to note that companies have revised their earnings estimates to a bar that would hard not to beat even with a modest pick up in growth for the second quarter… as we saw today that is enough to get the ball rolling on the upside after the stall on Wednesday. I will go on record with the same comments I started the week with… this is a news driven market first and foremost. Technical data is the driver for investment decisions in this current environment. Take what the market gives and let the rest work itself out. Maintain and mange a disciplined approach to managing your risk.
Taking this approach puts you in a position of having to give more room for volatility in the trading process. Thus, measuring your risk/reward of each trade becomes more important. For example; if you took the trade posted (S&P 500 Strategy) on the S&P 500 index (SPY) at $209 entry with a stop at $206.50 and target of $215. We could push the stop lower to $204 to allow for more volatility in the trade as the markets work through their respective worries. The lower stop would put it at the worst case for the current trading range. $206.50 is in harms way of a daily blip on the downside. Then why post it this way? I looked at it as if the blip lower happening one day or so after the bounce it was a false bounce and thus take me out of the trade sooner (aggressive risk management for the environment). If however, it went up then tested it gave plenty of room for the trade to work as it has the last few days. Now our stop has room to grow with the trade if the upside continues. The bottom line is having a strategy for the trade prior to taking the trade and let it work out accordingly.
I am not a big fan of this type of market… period. I like less chop, more trending as a result of better clarity relative to the trading environment looking forward. But, we don’t live in a perfect market world and thus we have to come up with strategies that match the environment we are in currently. The choppiness of the markets will make you crazy if you allow it. Unfortunately many traders/investors allow it by approaching their portfolios without a strategy or plan for managing their money. You cannot manage the market, but you can manage your money relative to your beliefs and discipline.
The upside remains in play for now and we will continue to look for and take what the markets offer. I am optimistic about the near term as earnings have started off on the right foot giving some optimism about the future market growth. But, that does not allow us to ignore sound risk management principles. Take one day, one position and one event at a time. Today was positive.. tomorrow we will see how it unfolds.