Reasons to be bullish, Reasons to be cautious

Yesterday I had an opportunity to discuss StockTwits 50 and Momentum with Howard Lindzon. In the end of the conversation, I let myself to be lured in the intellectual sophistication of macro and outlined the galloping commodity futures as a reason for a potential market selloff. Honestly, this was a dumb thesis. The market could decline for many reasons, but macro themes should be the last thing in the decision making process of the momentum investor. Price action and intermediate catalysts are what matter. Short-term price trends are fueled by momentum, medium-term price trends are fed by earnings related catalysts, long-term price trends are sustained by social and business trends.

Where the stock market is going is anyone’s guess. I am not in the forecasting business. Let’s objectively take a look at some reasons to be still bullish and reasons to be extremely cautious:

Reasons to be bullish:

– The breadth is great; There is a large number of stocks from different industries making new 52-week highs;

– Sector Rotation from Technology to Basic Materials, which could keep this market going for awhile;

– Many new stocks are setting up good risk/reward opportunities;

Reasons to be cautious:

– It is still a renters’ market. Even the slightest wrong step is severely punished. (refer to $EQIX and the cloud computing space from last week);

– Junkie, high beta, Chinese burritos are making 30-40% runs in a week;

– The market laws require a massive short squeeze, just before the next leg down.

“Good judgement comes from experience and experience comes from bad judgement” – Barry Le Platner