On Friday we said: “If we are correct, the market should float higher today in order to give call buyers (which in yesterday’s case likely represent smart money) the opportunity to escape with quick profits.”
And indeed, the market closed out the week on a high note.
Keep in mind that the run higher in the blue chips is primarily liquidity-driven. The deal with liquidity is that it can be profuse one day and the next day it can dry up. The problem with this is that when the tides turn and everyone starts to run for the exits, there are only a limited number of doors to escape through. This is what occurred February 27. Everyone sold at once and prices took a huge tumble.
There are some closely watched data releases this week, including home and durable goods sales. Could these bits of data drive the market to fresh highs or cause everyone to head for the exits?
Right now money has been flowing to the blue chips as the tech-heavy Nasdaq and more speculative small caps have both remained range bound and have been underperforming. The QQQQ closed Friday at the top of its range, where we have shorted it.
The QQQQ and small caps could play catch up if on the off chance that the market is ready to make a multi year run similar to the one started in 2003. It’s best to bet against these types of breakouts though, as they are anomalies and the probabilities are stacked against them.
Today is the day following options expiration and Mondays following expiration tend to bring options week hangovers, when positions are put on for the next month’s contracts. We suspect that today won’t be any different.
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