≈ Fundamental Disconnect ≈
As all the indexes are again reaching new highs we have some division in the markets. Since all the markets are reaching these new highs together then the division can’t be in the indexes themselves. The division is actually in the market participants and the philosophy of the traders. It seems that currently we have a couple of groups in the markets, we have the folks that see the market continually going higher regardless of economic conditions and then we have the folks that still believe valuations matter. Do you see yourself in one of these two groups? There are certain things that can move a trader into one of these two groups such as trading experience or perspective. The reality is that neither group is wrong or right, it is just a question of position.
Some folks might find themselves straddling these two groups and that is ok as well as long as one recognizes that if you are going to be part of the first group, meaning that they expect the market still has plenty of room to run, that you must prepare for the time when the market chooses not to go up anymore. This means that these traders need to keep a keen eye on the markets for any potential changing of the trend. For the second group who believes that valuations matter then it is important to have a perspective that takes into account that traditionally speaking valuations are at a higher point right now. This may mean not taking on further positions at these prices or it may mean having a plan to protect against a pullback in value in the future.
Regardless of where you fall in the above scenario, taking a look at ones positioning and planning for any change is prudent.
Chart of the Day
This chart of the /NQ which shows the index continuing to soar after breaking out of resistance on Friday. All the indexes are currently showing a very similar pattern. These all-time high prices are having an effect on the valuations of the companies inside the indexes.
Video of the Day
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