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How High Can It Go?


While the market feels like it SHOULD stop going up, it just won't so we must respect the trend until we see a change of character...

I don't usually field tons of phone calls from clients as my firm tends to keep folks updated daily or weekly with e-mails and such. But lately, this has all changed. Anyone that reads my stuff or knows me personally knows that I am a cautious guy - but not a bearish guy. There is a huge difference in my book.

The calls I am getting aren't criticizing me for being under-invested as the Dow Jones Industrial Average makes new highs, but I am being asked several times a day, "Why on Earth is the market doing what it is doing with this awful economic backdrop?" And this is from a group of generally talented, successful bright people.

All I say to people is that "markets can stay irrational longer that you can remain solvent," a quote borrowed from Keynes. Obviously, irrational is a harsh term, but I do think there is a disconnect present between Main Street and Wall Street as I recently wrote in my quarterly newsletter. I have no idea how long the disconnect can last, but most likely longer than I can think.

I also say that all of the cautiousness is a source of demand that could last a while. I just don't know how long, but maybe we should re-read my 'Only Time Will Tell' piece from Minyans in the Mountains. I am neither happy or sad about missing some of this rally, just realistic.

So what can we do during this time, MInyans? I have to say that as a risk manager, I find the market to be risky. In other words, I think downside risks are larger than upside risk. So for nimble traders, stay long and tighten up those stops. But for more cautious, 'big picture' types, stay cautious until the risk/reward ratio is favorable.

The amount of fuel in the marketplace is large, to be sure, judging from my conversations. In addition, mutual funds were actually net sellers of stocks last month to the tune of $10 billion. And short interest is high, although there is no way to know if it is hedged somehow with futures, options or something more exotic. But high short interest is fuel for a rally as they scramble to cover. Fibonacci series (defined as a mathematical series) and trend lines suggest 1365 as a likely top for the market (the broader S&P 500) as I have pointed out in the past, but we'll have to see if that holds. Lastly, while the market feels like it SHOULD stop going up, it just won't so we must respect the trend until we see a change of character (like the market selling off on good news), which to me is a daily close below 1340 and then 1290.

Until then, as they said in Wayne's World, party on dude.
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No positions in stocks mentioned.

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