Concerned about DIA over-exuberance?

Are you concerned about DIA over-exuberance?  I must admit that I am becoming concerned because all the bigger indexes are not participating.  I’m concerned that incredible weight that only a few companies in the Dow are lifting could soon reach a breaking point.  Earnings have been driving this move it is entirely possible that it could continue for a while longer.  A tough lesson that I learned many years ago is that the market can stay irrational much longer than I can stay solvent trying to bet against it!  However, that doesn’t mean that I should be complacent, failing to recognize the market condition or having a plan to protect my profit and trading capital.  The sky is not falling, but a storm could be building on the horizon.  I’m only suggesting it’s better to have your umbrella with you than having no protection at all.

On the Calendar

Friday’s Economic Calendar begins with the very important Employment Situation report at 8:30 AM Eastern.  Employment numbers have been very strong all year, but forecasters expect it will slow this month to 178K down from 222K.  They expect the unemployment rate to be 4.3% and the hourly earnings to remain weak at 0.3%.  Also at 8:30 is the International Trade numbers which the forecasters see narrowing to 44.4 billion deficit versus 46.5 last month

On the Earnings Calendar, we have about 100 companies reporting earnings today.  Next week is another huge week of reports with more than 1200 companies reporting so stay on your toes and expect additional volatility.

Action Plan

Every day this the DIA has managed to not only gap up also set new record high prints doing so.  Futures are suggesting we will end the week doing the same, gapping to a new record.  Unfortuinatlyy the SPY, QQQ, and the IWM have not participated with this amazing DIA run.  Only time will tell how much longer this will last, but I must admit that it makes me very nervous because it is such an abnormal market conditions.

There is no doubt that the trend is still up.  However, I’m worried that the DIA tremendous exuberance has set the stage for a huge increase in volatility very soon.  The VIX has been signaling complacency for some time and five straight days of the DIA are gaping up with out the bigger indexes participation signals the same.  While it is true that earnings reports have been very good, continuing to have the DIA lift that much weight seems unlikely.  Please understand that I at not at all bearish on the market.  I am merely pointing out that if the DIA begins to roll over don’t be surprised to see some very fast profit taking and a big spike in volatility.  I will continue looking for long trades but will be more focused on taking profits ahead of the weekend.

Trade Wisely,

Doug