Fickle Trading Action Highlights Cautious Sentiment

“Ahead of the Street” Column, by Mitchell Clark, B. Comm.

Despite the recent improvement in sentiment, the stock market still has a long way to go before it makes a full recovery from the financial crisis. In addition, the recent upside looks to be quite lackluster. Trading action is without conviction and trading volume is only modest. So, from my perspective, investment risk for new positions remains very high.

Most economists expect the U.S. economy to slow dramatically in the first quarter this year. The current growth consensus for the first quarter is less than half the pace of annualized GDP growth in the most recent fourth quarter of 2009. If this happens, Fed policy isn’t likely to change until perhaps the very end of the year. Inflation numbers will become much more important to the central bank’s interest rate decisions over the coming months. Pretty much everyone expects muted economic growth, so price inflation will be a key metric for any changes in monetary policy.

There’s no need to be in any rush to take on new positions in this market. The case can quite easily be made for both the bears and the bulls. And, with no real tailwind behind the broader market, expectations for returns are moot.

Right now, individual stock selection is the only way to outperform the broader market. And, you have to do this with a trader’s mentality, because the fundamentals and sentiment changes so quickly. As a theme, I’d be looking to take profits from your winning positions if the broader market ticks higher.

Recently, we’ve been analyzing the situation in China a lot in this column and most U.S.-listed Chinese stocks are beginning to report their 2009 fourth-quarter numbers. The pro traders moving in and out of U.S.-listed Chinese stocks remain a very fickle bunch. Even if a company beats consensus estimates, the stock often sells off after earnings news, because a lot of stocks have already performed so well. I really get the sense from watching a lot of the trading action that pro traders are using any good news to cash out of their positions. And, it’s unclear where the money is going next.

I think a lot of traders are taking profits in this market and are building their cash positions for the next attractive entry point. Very few traders have a defined view of where this market is going over the next month or the rest of the year. Accordingly, there’s a real cautious tone to the current action in Chinese stocks.

It’s a wait-and-see market right now. There’s no big reason to jump on any train just yet.