If 2014 will teach traders and investors anything, it will be that reading too much into any market move is a dangerous, wasteful way to make a living. That is because this seems to be a market that is setting up to be as deceptive as possible. It did it from the very beginning, when it refused to stick by a very dignified ally in January. Instead, it made this friend look like a silly, obnoxious turd. An act of utter defiance in the face of pleasant circumstances.
This recent rally exhibits the point perfectly. The rally we are experiencing caught investors off guard after what looked like dismal circumstances to begin the year. It has gone beyond any point of reasonable retracement, with important indices like the SOX hitting new highs, while the bears have been taken for another ride.
Given the modus operandi this year, the current rally should be trusted about as much as the dip the preceded it. Both are lies. Both should be looked upon with skepticism. And both tell you nothing about the market except for the fact that it is unpredictable.
This is the market we are operating in, however. And I have a distinct feeling that a majority of 2014 will serve the purposes of unpredictable behavior and random movements. With that said, the importance of stock picking should be at the forefront of the investors' mind. This is followed closely by the practice of taking a minimalist stance towards general market analysis.
A market environment of this nature will benefit two types of investors:
1. Those who know how to pick the right stocks and are willing to hold onto those names, realizing that winners are now more difficult to come by than previous years
2. Those investors who have the common mental decency to realize that even the best short-term market analysis can, in certain circumstances, be rendered completely limp.
In essence, investors who stick to the right stocks without over-thinking the general market will excel. Investors who bounce around the market, attempting to analyze each step the market takes will suffer.
It will become exceedingly deceptive as the seasonal tendencies give way to the black hole that is March-May trading. Along that path, will come correlation studies that will call for market crashes. Sentiment studies that will call for smashing rallies. Technical indicators that warn of tremendous volatility. A potpourri of ravenous circus performers begging for investors' attention.
Tread lightly. Tread smartly.
