1) The market reacts positively to bad news. Negative headlines and terrible earnings reports are ignored. As the saying goes, reaction to news is more important than the news itself. Good reaction to bad news is the ultimate indicator of positive sentiment. Never underestimate the power of optimism in the market – it feeds on itself and creates positive feedback loop.
2) Plethora of high-volume breakouts to major new highs, representing different industry groups. The so called “market of stocks” environment.
3) Low correlation market, which produces both winners and losers. There are good ideas for both bulls and bears.
4) Defensive sectors underperform. Capital leaves perceived safety and rotates into more economically sensitive sectors.
5) High beta names outperform as the fear of missing out becomes higher than the fear of losing. Small caps, emerging markets, low priced stocks outperform.
6) The financial blogosphere will be filled with skepticism. Six months of trend-less , volatile market that was dominated by mean-reversion could certainly condition even the most experienced market participants to be extremely cautious with new breakouts. The rule of thumb is that during pronounced uptrends, there will always be people who will complain that the market is overbought and warn for an impending correction. As Schopenhauer stated long time ago: ““Every truth passes through three stages before it is recognized: In the first it is ridiculed; in the second it is opposed; in the third it is regarded as self-evident.”
7) There are so many breakouts that you are confused which ones to take. You feel like a kid in a candy store or like an adult in front of a cheese stand with 200 options to choose from. This is normal – the human brain is meant to operate in an environment of scarcity. To cope with a situation like this, we have invented shortcuts that mean different things for different people. Technical analysis is one form of a short cut.
8) Breakouts stick and have a follow through.
9) Most of the dips you buy, turn out profitable.
10) Major market indexes are trading above their rising 50dma. The moving averages are typically lagging indicators, but they often play the role of a good point of reference.
11) Market indexes are rising on increasing volume. The pullbacks are on lower volume
12) People ask why such and such stock is up 15% today on now news. Sometimes the only news you need is the lack of bad news. Positive sentiment and money flow are powerful catalysts that could continue longer than most expect and have bigger impact than most are willing to comprehend.
13) Your confidence increases substantially and you honestly believe that you are the best trader in the world. Don’t confuse brains with market uptrend. Overconfidence is the single biggest reason for investors’ demise. The second biggest reason is ignorance, but this is a topic of another conversation.
No matter the market environment you trade in, paying attention to risk management is of utmost importance. You don’t have to be right, you don’t have to be original, you don’t have to be first, but you have to take favorable risk to reward trades. If you don’t have a plan, you will become part of someone else’s plan.
I know 13 is an odd number, but this is all I could come up with at this point. Add yours in the comment section, if you will.