This has been a very strong move for stocks over the past couple of months and though I’m turning more cautious I wouldn’t step in front of it by going net short. The strength of this rally suggests a good deal of investors were caught underinvested or short and they’re now playing catch up.

Strong moves like this one, either on the downside or upside, are rarely reversed in short order. It takes time for those playing catch up to do their business and for powerful sentiment (greed or fear) to begin to wane. This is why traders like to say, “don’t fight the trend.” The best traders are from Missouri. They keep their eyes open for clues but they’re also patient. They don’t jump the gun. They let the market tell them when the trend is over.

Right now we’re getting plenty of red flags for stocks but prices just keep going higher. And not just higher – almost straight up. Like I said, it’s a strong trend and it’s not yet telling us that it’s ready to be done. Smart traders are taking all these red flags and putting them in their back pocket. When prices tell them they’re done going up they’ll pull them back out of ¬†their pocket and use them as justification for selling. But price is the true arbiter so, for now, just watch the tape.

Chart of the Day

Like I mentioned it would the other day, the S&P 500 made a DeMark Sequential 13 sell signal on the weekly chart yesterday right as it bumped up against the top of this ascending wedge. The bottom line is the technicals are lining up in the bears’ favor, suggesting further gains for stocks are unlikely and a reversal may be in the cards. Long-term investors need not pay these sorts of indicators much heed; traders and those looking to hedge, however, should put this one with all the other, in their back pocket.

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Hit the Links

  • The Stock Market Knows Something (Hays)
  • January Indicator Trifecta Leads to Next-Eleven-Month Gains 88.9% of the Time (Stock Traders Almanac)
  • Bernanke Seen Buying $1.14 Trillion in Assets in 2014 (Bloomberg)
  • The Stickiness of iOS Makes It Tough for Apple Users to Stray (AllThingsD)
  • Scott Adams strategy: “Buy at the wrong time and hold until all of your money is gone.” (Dilbert)
  • Low bond yields make advisers reluctant to rebalance (WSJ)
  • Top golfers (just like traders) know what they can and can’t influence (Kirk Report)
  • 8 Reasons to Deactivate Your Facebook Account (Mashable)