The market is getting out of rhythm.
For those of us who trade for a living, after a time we notice a pace, or rhythm to the market. If looked at on a chart, the rhythm takes the subtle form of waves, a drift between the constant pull of buyers and sellers grappling for control of sentiment and price. Waves are a good thing, allowing both fear and greed to have their day in the sun, and keeping a constructive market constantly in check.
Though U.S. stocks continue on their seemingly never-ending push higher, we note the lack of pace, or rhythm to the recent rise. There have been no pullbacks, no pause. Just up, up, up. A constantly rising stock market may look good in a portfolio, but eventually a forever up market runs out of buyers, and when that occurs the move down can come in quick and dramatic fashion.
We are in no way saying there is an imminent market decline coming. The market can do whatever it pleases, and for the past couple of months it’s wanted higher, no doubt about it. What we are saying is that the stock market has lost its pace and rhythm, and is opening itself up to the increasing possibility of a sharp reversal where the late to the party traders suffering from FOMA (fear of missing out) are suddenly caught on the wrong side of the trade.
The end of year and holiday seasons should blunt any attempts at taking the market lower, but we would like to see some pullbacks to bring the U.S. stock market back into rhythm, and providing a firm base to launch another move higher.