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Investors Walking a Fine Line This Week

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Expect pockets of activity after yesterday's weakness. Above all, investors should be wary of not becoming overly confident or complacent.

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Despite some early weakness yesterday on the heels of another borrowing-and-lending rate hike in China, the troops once again displayed the sort of calm confidence that has served them so well so far this month. They weren't able to put up big points, and the indices finished the day little changed, but for another time, they frustrated market players looking for some sort of correction to take hold.

Under the surface, the action was quite typical of what you'd expect to see this time of year. Volume was remarkably light and traders were more than happy to aggressively pursue pockets of activity, particularly in the rare earth and small biotech groups. There was an unusually high level of call option activity and some big gains in names like Molycorp (MCP) and Avalon Rare Metals (AVL) yesterday, so it's hard not to imagine that someone got an early tip on news that China would be cutting its rare earth metal export quotas. However, those small biotech names, like DARA BioSciences (DARA), Repros Therapeutics (RPRX), and BioSante Pharmaceuticals (BPAX), really belied the level of speculative activity present throughout the trading session.

With the market so incredibly extended, some "bottom of the barrel" trading in so-called "junk stocks," and technical damage in market leaders like Baidu (BIDU) and Chipotle Mexican Grill (CMG), there's very little doubt that the market is walking a fine line right now. Does that mean, though, that we need to unleash our ursine tendencies in anticipation of an inevitable correction?

This time last year we had remarkably similar conditions, and once the positive seasonality evaporated, we hit an air pocket that shaved more that 8% off the S&P 500 in three weeks. Certainly the same thing could happen again, but if there's one thing that the market gods have showed us time and time again, it's the dangers of being overly anticipatory.

My plan, then, is to continue to trade this action the best I can. That means playing those pockets of activity, but taking gains where I may have them, keeping stops very tight, being prepared to head toward the sidelines, and above all, not becoming overly confident or complacent. Trends last far longer than may seem reasonable, but they don't go on forever.


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Position in AVL
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