Well I think the easiest answer to the first question is that the market usually does what it is doing if you can understand that. Contrarian trading has a high probability of failing unless you are strategically trading the trend which entails buying dips and selling profits on rips without shorting. If you are just trying to be a blind contrarian, ignore the trend, and just short your account away then be my guest.. just understand you are part of what is fueling this rally and the people like me that don't fight it are loving it.
I won't lie and say that I haven't been trying to short some weak stocks, but the difference in what I do and contrarians is a big difference. I will manage my risk and get out of the losers as quickly as possible. Once the risk has been contained in those short names, I will look at what is working for me and start looking for places to add. Do more of what is working, and less of what isn't. Contrarians do the opposite, they do more of what isn't working on the anticipation that it will and take off the positions that already are working.
Second question, where are these new buyers coming from? Simply put, the Fed. I know, a cliche answer, but here is my reasoning behind it. These investment banks have bad assets on their books and they need to get them off and get some clean capital for them so they can stay in business. That is where the Fed comes in. The Fed is buying up their trash assets and giving them clean capital. Ok, so now what? Banks have clean money and we are in a raging bull market. 2 + 2 = 4.
Remember, this entire rally has been on historically low volume. What does that mean for this discussion? It means that the core buying coming from the Fed is having a larger impact on the market because of the lack of volume. The final questions, how long can this last and how to trade it. Well it is very likely that every dip is going to be bought by the core buyers in the market as long as the fed is supplying the bailouts. At the same time, these contrarian traders are going to keep shorting the entire way up and be forced to buy back their shorts creating more buy pressure along with the banks all in a low volume environment. I don't believe (but I could be wrong) that the shorts are part of the core buying in this market, I believe it is the Fed supplying the buyers at the very core. Shorts, hedge fund buyers, retail traders, brokerages, etc. are all secondary buyers but they are there.
I understand that this is very basic information for the professionals out there but I just feel like I should lay it out there for the record. None of us know how long this can continue to go on for, but what we do know is that it IS still going on right now. The market is still very bullish and all dips are still being bought. So getting to the last question, ask yourself what you would rather do. Would you rather predict some drastic change in the market is right around the corner and put your account in that position? Or would you rather go with the flow and admit to yourself that you have no idea when this is going to end and it has already gone on longer than you thought. Also think about the psychological aspect of this. If you choose door number 2, then all you have left to do is to identify great setups and manage your risk.
I'm on StockTwits and Twitter @M5amhan and I put out a quality list of setups every Friday (sometimes Saturday) for the next week based on what I talked about in the last paragraph. I identify great setups and manage the risk on the ones I decide to execute on.
