Momentum Monday - What Can Stop The Rally?

Everything seems so idyllic in financial markets right now. Inflation is coming down and with it interest rates. The US Dollar is pulling back. The Nasdaq 100 and the S&P 500 are at all-time highs. Small caps are starting to outperform. The speculative areas of the market are running wild. Anything crypto-related has been on fire and accelerating. Biotech and cannabis stocks are also starting to wake up. The last week of the year will probably be more of the same. Smaller cap, highly-shorted stocks making moves and outperforming.

In markets, long periods of stability lead to complacency, which brings instability. We saw a glimpse of it last Wednesday when all of a sudden the entire stock market sold off for no apparent reason. Typically such quick one-day drops don’t mark the top as we saw recently but they often serve as a wake-up call to many. Maybe, chasing is not going to be as mindless as before. I doubt it. That pullback lasted a couple of hours and most stocks fully recovered in the next two days. Everyone is giddy and getting ready for some of the craziest times for trading – the first three weeks of the new year. 

My message remains the same. Don’t chase blindly overextended stocks and always consider the risk involved first before you open a new trade. Every single trade involves risk, no matter the market environment.