"Buy the highs" keeps the S&P buoyant

With all the previously mentioned negative currents plaguing the stock market, what’s keeping the major large cap indices afloat?  One factor is increased M&A activity.  As I alluded to earlier in tonight’s report, the pharmaceutical industry is experiencing a plethora of mergers.  Other industry groups represented in the S&P 500 are experiencing the benefits of swelling interest in M&A as well. 

There is also the simple psychological impact of Wall Street’s “buy the new highs” mentality.  In what has essentially become a self-reinforcing feedback loop, traders have been conditioned this year to buy stocks making new 52-week highs.  This trend can be clearly seen in the following graph, which shows the cumulative performance of the S&P 500 during the opening hour of trading. 

 As you can see here, traders have been extremely bullish at the opening of the trading session for most of the time since February.  With the Dow, NYSE Composite and S&P 500 indices so close to all-time highs, it doesn’t take much force to keep the indices buoyant.  A bullish news headline – be it an earnings surprise, a merger, or other bullish event – is sufficient to keep the indices above their immediate-term trend lines. 

Even with all the negative cross-currents out there, as long as trader psychology remains ebullient, the market will be subject to the whims and vagaries of short-term momentum traders who buy the bullish headlines.  Remember that even when the technical picture is negative, investor psychology can trump all other considerations – at least in the short term.

[Excerpted from the Apr. 28 issue of Momentum Strategies Report]