Behavioral Trading Update for Wednesday 4/22/09

Sorry for missing the entry yesterday!  If you look at the chart above, it seems more and more apparent that the market has run out of steam and that the rally is probably over for now.  On this blog, we recommended that traders take profits right before the S&P hit resistance and 875, and it appears that a lot of people did that (certainly not as a result of this blog, of course).  And now, as we've also discussed previously, it looks like we'll trade sideways for awhile.  During the rally, investors were looking to buy on dips and ride the market up.  Everybody is now locking in those profits and taking money out of the market, but they'll be much quicker to put it back in if we hear some good news than they have been over the past several months.  Let's look at the VIX:
After seeing a massive spike on Monday, the VIX has settled back down and remains below the 40 level.  Monday's spike could turn out to have been a positive move for the market, as it reminded investors not to be too complacent with their positions, which works against panic selling and major moves to the downside.  Regardless, if the market is truly trading sideways, then it is all the more important to keep an eye on the VIX to figure out how comfortable investors are feeling and try to gauge what the next move might be.

I'll continue to suggest that this is a great time to trade on fundamentals.  If we're trading sideways, then we'll tend to see larger gains in fundamentally stronger stocks and larger losses in fundamentally weaker stocks.  Buy the stories you like and short the stories you hate.

Charts courtesy of StockCharts.com