Economists expected US GDP to expand by a 3% annual rate during the fourth quarter. It didn't — instead expanding at a 2.8% clip. Traders immediately sold futures, only to buy back stocks an hour later when the market opened.
We should continue to expect this tug-of-war between bulls and bears to continue for a while as the market approaches important areas of resistance. The emotional game has to play out — and you'll have to wait and see what side wins over the hearts and minds of the market and its many participants.
Simply put, it is dangerous to "take sides" this early in a trend. For instance, traders were buying stock early this week as if it were their last day on Earth. Unfortunately, the buying didn't stick, and most stocks have found lower ground. Expectations went from bullish euphoria to an almost unanimous consensus that a pullback was in order in just a few days.
None of this back-and-forth action is cause for alarm. Stocks have been climbing steadily for weeks now, so we will eventually need to see some sort of correction. This can happen one of two ways — through price or time. While there is no way to say for sure how the market will digest its strong start to the year, it appears that stocks want to churn sideways for a bit.
For now, a sideways market makes sense. Despite the strong start to 2012, I do not believe the investing public is getting too greedy at this point. But it is fairly evident that at least some level of comfort is returning to the markets. So we'll walk the tightrope of fear while the major indexes sneak toward important areas of resistance. That's where things will get interesting…
The Dow is already extremely close to matching its 2011 highs — and the S&P isn't far behind. Here's a weekly look at both indexes, with areas of resistance marked with dotted blue lines:
How investors react to these key levels will determine the strength of the rally over the next few weeks. Obviously, a clean break of the previous highs will help put the past 6 months behind us. With clear skies ahead, we should see additional interest in smaller stocks — and more trading opportunites in the small-cap and microcap universe.
What's important right now is to train yourself to be able to see the forest through the trees. So many traders get hung up on the day-to-day movements of the market, letting their emotions get swept back and forth with every high and low. Micro-analysis like this can lead to chasing stocks, bad entries and exits, and losses. But even more importantly, if you let the tiny movements of the market get in your head — especially duing important turning points in trend — you'll risk missing the bigger move entirely.
