How We Know That the Market Is Tired

 |  Includes: APOL, GME, STRA
by: Leigh Drogen

The market is doing what it loves to do, move higher without traders. Earlier this week I pointed out that good risk/reward setups had pretty much disappeared from the market, which usually means that within a few days we are set for a pullback of some sort. Stocks don’t go straight up forever, they need to build bases along the way. As well, the cloud names that had been beaten down were not yet ready to be bought again; it’s going to take a few more weeks or even months to set them back up for good entries.

Of course instead of pulling back, the market just continues, but someone else is happening underneath the tape. Over the last three days my P&L has been extremely volatile: Tuesday was a disaster, Wednesday I made it all back and then some, and yesterday was not fun at all as I was taken out of several positions by trailing stops, albeit with great profits from big trends. The point here is that momentum stocks in my book were not keeping up any longer with a market that refuses to go down. That is a sign of a tired market. Does it mean we’re going lower, no. But it does mean that the best course of action is to lighten up, because the easy money on this round has been made? Now it’s going to be a struggle.

So as I’ve gotten taken out of some positions, I have held off on replacing them with new setups. I’m about 70% long here, 10% short GameStop (GME) and Strayer Education (NASDAQ:STRA). I also took off the other side of the pairs trade in the long Apollo (NASDAQ:APOL) / short STRA trade. I am now naked short STRA.

I could be just another trader in a long line to say that this market needs to rest, and get left behind with too little long exposure, but I think the risk/reward here is not right for adding back that other 30-35% of long exposure that I had on at the beginning of the week.


I just took a walk around outside, came back, looked at my screen, and got that little feeling of fear of not being involved enough on the long side for the first time in a while, maybe 4 or 5 months. I took a look at Chipotle (NYSE:CMG), Riverbed (NASDAQ:RVBD), Amazon (AMZN) and a few other stocks, and knew right away that I shouldn’t be adding here any further. I’m very good at reading my own emotions, and that got my heart racing a little with jealousy, almost always a sign that it’s time to take the foot off the gas and sit back, maybe even sell some more stuff.

We will see.