Don't mind me - I'm just sorting out my thoughts about this current market and how best to play it. Getting my thoughts down in virtual ink helps put it all in perspective. Feel free to share your own thoughts as well.
Once again the market avoided a third consecutive day of declines. You have to go back to early August to find the last time the market declined for 3 consecutive days. On August 8th and 9th the market finished the day down to mark the 3rd and 4th consecutive days down. That is only time that has happened since this rally began on July 18th. No doubt a fantastic run which has culminated in a record high for the Dow today.
Admittedly, it's difficult to come up with a good strategy up here. Clearly, we are overdue for some significant consolidation and it concerns me that it took a big drop in commodities to propel the market today. With a soft landing continuing to be priced into this market and oil and commodities feeling out a bottom (which should happen sooner rather than later), just what is going to propel this market higher? You guessed it - earnings. Would I be willing to bet the farm that earnings guidance this quarter (for future quarters) is going to be beyond expectations? Heck no!
On the bullish side, there is one big X factor in play here and that's retail speculation. At what point does Uncle Larry take notice that the Dow has made new highs and puts some of that savings to work in the next "Google." At what point do all those real estate speculators start speculating in stocks and out of work real estate agents become stockbrokers? Will it happen? You would see it in the trading numbers out of Etrade, Ameritrade, Charles Schwab, etc. but it may be most apparent at cocktail party small talk. When the conversations shift from real estate talk to stock talk you'll know. What are you hearing?
All in all I still feel it's a gamble playing big on the long side up at these levels, but at the same time it doesn't pay to fight the tape. I'll continue to play the long side but choose new long entries with lower risk (ie. initiating positions in high quality stocks with considerable momentum and near major support levels) and maintain a decent cash position with a smattering of shorts). I'm always comforted by the fact that as an individual investor I can reposition quickly and avoid large losses. Something large funds can not do (ahemm... Amaranth).