Leadership?

This chart has been worrying me all year. It is signaling a tied old bull market. A market that has been going higher on a smaller and smaller amount of stocks. At the end of last year we were getting healthy advancers by a broad bunch of stocks from many sectors. Just the way a healthy market acts and one that is pretty easy to play. You just need to throw some money out there and you will catch a few winners. But what we have had this year is pretty worrying. The leadership group is getting smaller and smaller. More and more stocks are going nowhere. And as we approach the end of the year it seems that although we will set another double digit gain all is not well. The gains this year in the indices are thanks to a few big caps (BHP, RIO, CBA, WOW etc.) but under that most stocks have been going sideways. And this I believe is about to teach many a market reality lesson. When you get markets that make broad advances its easy to believe that you are good at this game. You get lucky with some spectacular stocks and you forget about the nasty draw downs that happen from time to time and even tell yourself that you have learnt from them and you will handle them better. In your head you have the mid-cap miner that made you a 300 % gain and have already discounted all the losses in your mind and the P/L you never look at.

Now all the momentum players are piling into the fewer and fewer strong stocks, as you should as they are the only ones going up, just like moths to the flame. People that are using highly leveraged techniques with poor risk management and little skill (retail CFD accounts, Margin loans, Option strategies taught during a weekend course, SMSF) that have worked during a full on market advance are now getting bottle necked into a handful of momentum plays. They will continue to play this game pushing fewer and fewer stocks higher but the money now is in a different game. Well I believe it is.

One that is buying low  and selling a bit higher and then shorting and then covering a bit lower then starting again. Most will not realize that the run we have had from 2003 to the start of this year has been a very special move that is probably over. If they continue to play with the same tactics as the market signals changing times the highly leveraged games will hurt, but probably by the time they realize or are stopped from 'playing the market' by their wives it will have changed again. Ready to suck new punters in. Unless this chart can print some healthy highs my tactic has changed from being a market moth to fading every move. I am expecting to see zig zags on charts from here not straight lines.

Comments

[Charlie]

I dig what you're saying....any hints for daytraders?

[Muddy Farmer]

Since the call here on Nov 22 to buy them dips, the XJO's up 300 points.
300 x $25 = $7500 per SPI contract. I'll take that, thank you very much. Ho, ho, ho.

The Magnificent Seven (RIO, BHP and friends) powering this rally will deliver us another 300 points. XJO 7000 by the end of January here we come.

If bulls climb a wall of worry, then this is the mother of worry walls.

After Jan, it's gonna get wild and rocky. Traders will love the volatility next year.