Late Money Needs to be Cautious

We have completed the first hour of today’s trading and volume on the NASDAQ, which is the leading index and thus the one we heed for market clues, is the strongest for a first hour in over a month. It’s even stronger than what we saw on 7/15, the day the bullish move finally gained steam. And therein lays a cautionary sign.

When a rally begins on a burst of volume, such as we saw on 7/15, this is a sign of likely higher prices ahead. The volume provides the fuel to move higher.

But when you see even higher volume on a rally that is already extended it’s time to exercise some prudence.

This is a sign that the rally is finally registering with retail investors and laggard investment managers. They are literally throwing money at the market in a desperate attempt to not be left behind.

Such a move usually signals an imminent end to the upward momentum.

This does not mean that you should look to short a coming correction. We have mentioned on this page that we are bullish over the intermediate term and that corrections in the early stages of powerful new rallies can often last just one day.

It is a call to be less aggressive; to hesitate in initiating new positions and trim intelligently entered positions to bank some hard won profits. And await a likely pullback that will serve to scare the late comers and provide new entries for savvy investors who will buy from the panicked weak hands.