As the market nears all-time highs the general public begins to hear a steady barrage of doomsday prognostications along with their counterparts screeching that this is the start of a new bull market. You can currently go to the bookstore and find multiple books predicting the end of the fractional banking system, with some going so far as to predict the end of modern civilization as we know it. You can find the proclamation of a new bull market in several print magazines and a host of popular websites. Here is my take on the situation: Things are never quite as good as they seem, and things are never quite as bad as people think.
The truth of the matter lies somewhere between these two extremes.
As short-term traders where the market goes is of little consequence, at least from a trading point of view. Of course, the direction and velocity of any market move can have a profound effect on our personal lives. Let’s stick with trading for the time being, though.
Since the market is nearing all-time highs and P/E ratios are on the high side, I would think a prudent trader would be cautious when trading into all-time highs. Breakout trading into new all-time highs is dicey business. The logical assumption would be to trade to the short side, right? Nope.
As a trader, we are chart traders and a sensible approach to this precarious market would be to trade what you see on the chart, just like as you always do. There can be cautionary spikes in price, both long and short, that should be a reminder that powerful trading forces on both sides are making plans of their own for eventual market outcomes. Still, we are chart traders and we still seek to understand what the chart shows and the context of the market.
So, should you change your trading style with all the hoopla we are hearing?
The proper course, in my opinion, is to continue to trade the way you would on any other day; but I would have an idea in the back of my mind that these are times of heightened emotions and would trade to the conservative side of things. Stick to your trading plan and be aware that unusual moves to both the upside and downside are now part of the trading equation.
As you may have read, just when everyone is convinced that market has to fall it continues up. Sometimes it explodes to the long side, this is called climbing the wall of worry and the market can climb the wall of worry a lot longer than your futures account can hold out. On the other hand, there are strong possibilities for spikes to the downside as bearish traders begin to probe for any weakness in the market. Your job is to stay the course and be aware that these are times of heightened risk and be diligent in avoiding high-risk futures trading.