Logic vs Momo

Momentum in the market is a very powerful force as current market action shows, but it is often wrong because it defies logic. Logically we know this market is and has been overextended, overpriced, and ready for a fall.

Even educated, knowledgeable money managers are bidding up price out of fear of not owning an already overpriced stock. Forget the fact that earnings are not from core growth of operations.

So why isn't it falling?

Why is the market not pulling back:
recent economic news has been demonstrating "better than expected" reports, a litany of "not as bad as expected" (read improving) economic reports, a contrived manipulated market that the government wants only to go higher, a bazillion dollars on the sidelines, a falling dollar that benefits the U.S. debt and thus the S&P 500 in currency translation, earnings not as bad as expected, etc.

In the end, the market action draws a net net conclusion, based on millions and millions of independent decision makers risking real dollars every minute of every day. When I take a trade, after due diligence is complete, I only have one thing to worry about- do enough market participants see things my way to push price in my direction or not? I should add a second consideration here too; will they act on their conclusion today as I have?

Logic is compelling in a trader's approach to a trade. At the same time, if momentum is having its way, any logic that suggests being a contrarian to trend momentum is potentially useless. Ultimately I may be right, but exactly how long will I have to wait for the market to see things my way?

If you trade near term options you can't wait too long.

The battle in the market is not only between bulls and bears. When momo (momentum) is king, the third market animal appears. Pigs tend to play here as well. The adage "bulls and bears make money in the market and pigs get slaughtered" may be true, but when the big momo is the driver, pigs are making money... until that day of reckoning.

What makes traders crazy? The mental confusion that comes from the inability to distinguish which argument is the controlling factor: bullish or bearish based on fundamentals, or, bullish or bearish based on fear and greed in high gear, i.e. momentum.

Each one, fear and greed, panic buying, panic selling, throws logic out the window. The low of March 6, 2009 saw extreme fear and then extreme greed in one day. The highs of August 25th have been reached by an extreme fear of missing out which in turn brings in the greed of the pig traders all of which is served up as momentum.

As usual, the market always moves on fear and greed, sometimes extreme fear and greed. As always logic at major lows and major highs does not apply, in other words calling market tops and bottoms after huge moves is an action in futility.

There will be a top. Traders just need a sufficient reason to exit. Of course pigs will just overstay and overbite their trades and get crushed when momo fails them and logic takes control.

Momo may move on herd mentality, but reality (logic) eventually shakes out the excess and the market reverts to the mean.

Remember another adage, the market can be irrational longer than you can stay solvent betting against momentum... assuming you've identified it correctly.