We've had a very nice move up in the stock market.
More than just nice — one of the best moves ever.
We went up over 3,000 points in 6 months.
You've watched in disbelief as our resilient markets climbed higher month after month as you continued to wonder — how long can this last?
There are some strong signs indicating that this ride may be reversing directions.
Here are five warning signs that the rally could be over:
No. 1: Failure to Make New Highs
Both stocks and the overall market have been unable to break through their latest highs. When the ceiling is firm, you need to check the floors. Traders will want to make sure that stocks have solid support underneath them before attempting to push higher again.
No. 2: Stocks Are Starting To Trade Lower After Good News
From the AP wire: "The drops came despite upbeat economic data, with U.S. manufacturing showing growth for the first time in 18 months and pending home sales rising more than expected to a 2-year high." The strongest sign a trader can see is an up move following negative news. The reverse is what we are starting to see now: a down move following positive news.
No 3: Unemployment Continues To Remain At Uncomfortable Levels
If you think about the fact that you can only receive unemployment for a set amount of time it makes you wonder, what would that number be if the people who were no longer allowed to receive it counted as well?
No. 4: Overseas Markets Are Indicating A Downward Trend
Once thought to be a lagging indicator, it is now uncertain as to who is leading who. We can't confirm that Europe and Asia are in the lead but the possibility is there, so more attention needs to be paid to these markets. (They traded lower last night as well.)
No 5: The Effects of the New Administration Will Start To Run Their Course
The face of our country changed with November's election and Obama's January inauguration. If or when the tax increases that were talked about become a reality then consumer sentiment could fall to new lows.
According to ABC News Senior White House Correspondent Jake Tapper: "President Obama's budget proposes $989 billion in new taxes over the course of the next 10 years, starting fiscal year 2011, most of which are tax increases on individuals."
As you try to anticipate the stock market's next move, continue to look for other "tells."
Example: AIG's short squeeze was quickly subdued with a big selloff instead of being held up on emotion for days or weeks. The duplicity of its move was evident from the beginning but the speed of the correction could be an indicator of a more macro market sentiment.
Example: The financials, as a whole, led us up and if they continue to retrace then that's even more weight on a market that seems as if it is being pulled down. You can even make a separate portfolio of just financial stocks and check that every day to see where the sentiment lies.
Everyone is unsure of what is going to happen next.
"People are a bit cautious. A lot of money has already flowed into the markets," said Lorraine Tan, director of equities research at Standard & Poor's in Singapore. "The question now for most investors is 'Do I put more in at these levels or wait for it to correct more,' because there's uncertainty out there about the strength of the U.S. recovery."
The key is to embrace that uncertainty and fall into your comfort zone.
Trade smaller sizes, take more of an active role in managing your positions, and don't lean too far in one direction.
Being able to recognize what's happening gives you a head start on the masses.
By positioning yourself ahead of the crowd, you will be able to have smoother and more successful trading on both sides of the market.
The goal is not to scare you out of the market.
Nothing is permanent.
Any change in direction will undoubtedly be followed by future changes in direction.
The goal is to make sure you take an active role in managing your stocks vs. a passive one.
You can profit from these market moves.
You should be profiting from being ahead of the herd.
Keep your guard up but be ready to land some punches too.
Learn more at AdamMesh.com
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