With US stocks making new highs for the second day in a row, a lot of people are speculating about whether they can go higher.
By Vikram Rangala
Thursday, February 19, 2015
A few headlines this week involve prominent investors talking about moving money out of US stocks. If you look closer, they’re only saying that they plan to diversify into the relative bargains in Europe and Asia. George Soros sold his Apple holdings; several large funds are similarly exiting profitable US equity positions. None of them are bearish on the US.
Nobel Prize-winning economist Robert Shiller came on CNBC to talk about shifting his portfolio towards Europe. "I'm thinking about getting out of the United States somewhat. Europe is so much cheaper." The key word issomewhat. And the key fact missing from CNBC’s report is that Shiller also opened a new fund that invests in undervalued stocks in Italy, Spain, and Greece. I would make a joke here about him “shilling” for his new fund, but I will refrain.
The only truth is price
To traders, unlike TV analysts, this is just profit-taking after a good run up. Is it about the European economy, Greece, the impending rise in US interest rates, crude oil, Ukraine, ISIS, or the rumored Apple electric minivan? For many us who trade, the answer isn’t yes or no. Our answer is, we don’t care.
It’s not that we don’t think these factors affect the markets. But technical, trend-following traders—which is a large portion of professional traders—tend to think there is only one truth in the markets: price. The price represents a point in time when someone was willing to buy what someone else was offering to sell. It’s an actual agreement, a thing that really happened. Everything else is opinion.
How high is too high?
The challenge in US stocks is that they are already high. Well, high compared to before. This summer we could very well find ourselves with the S&P 500 at 2250 or 1900 and we’ll have new definitions of “too high.”
Floor traders in the S&P futures have an expression for this: “Too high to buy and too firm to sell.” Some traders refuse to buy at a new high. After all, the market loves to pull in longs and then reverse on them. Their plan of attack is to wait for a pullback. The risk of waiting, however, is that the pullback will be small or nonexistent and the market will just take off without you. You were right about direction, but you missed the trade.
For the last two weeks, the stock market saw large MOC buy orders, market-on-close orders placed mostly by mutual and hedge funds, totalling billions of dollars.
Yesterday, however, saw the first MOC sell imbalance in a while, $1.7 billion. It came just after the market hit an all-time high for the second day in a row. Well, if you’re going to sell, that’s the place to do it.
The question is, why were funds buying for 10 days before that? Despite all the news about US job creation, a likely resolution in Greece, stabilization of oil prices, or anything else, some of us have a simple answer: the trend was up, so they bought.
And now that they’ve made some profits, they’re locking them in. That’s pretty much it. Even traders who love to give their opinions on macroeconomic events don’t actually trade to prove their opinions correct. Whatever they might say or write, watch where they buy and sell. That’s the only truth.
All-time highs are a good place to consider Nadex
While we don’t aggressively push Nadex binary options in our commentary, US stocks right now are a great example of when traders should consider them. You can take limited-risk, short-term positions with lower costs than trading a futures contract or close-to-the-money option. The Emini S&P 500 futures, for example, requires a $500 margin per contract to day trade. For less than that, you can buy 5 Nadex binaries and take positions from 20 minutes to one week long.
Whether you think the market is too high to buy and will head lower, or you think it’s too firm to sell and it will rally to a higher high, the market will likely agree with you for at least part of the trading day. Since Nadex binary options allow you to exit your position at any time prior to expiration, you can exit while the position is in your favor. Even if it turns against you later, you would already be out of the position.
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