After a trial ‘resignation’ stirs up more trouble, the military shows you who is in charge in Egypt.  Oh yes, and stocks like what they hear.

Thursday night I pondered if the market would sell on Friday since Mubarak did not really resign. Everyone thought he would resign, including the State Department, all of the administration, and thousands of people in the street. It definitely sounded that way when he began his speech. Once it became apparent that he was not quitting, the market started to sell back and futures were down after hours.

We were wondering if it would sell, and it was selling in the morning. Futures were lower. After the dry run of the resignation on Thursday, the military showed us who is actually in charge in Egypt. They politely told Father Mubarak that he better officially resign. The people in the street would not stand for it, and the military did not want to fire upon their own citizens. From the safety of his summer residence, Mubarak then sent his VP out to say that this time, no fingers crossed, he was resigning. When that happened, the market took off to the upside. It was enjoying itself with a nice run through mid-morning.

It set up a strong surge mid-morning. A pullback, a lower high, a lower low, and a little ABCD pattern. It had the expected response. It broke back to the upside and the market rallied into the close, posting gains on top of gains. NASDAQ +0.7%; SP500, +0.5%; Dow +0.35%, SP600, +1%; SOX, +0.8%. Very solid moves indeed.

Looking at the chart, after a test to the 10 day EMA on Thursday and a gap lower on Friday, buyers stepped back in and bought the stock market once more. The market continues to do the improbable, and that is to continue rallying after a run that has now equaled the August-November run. It is making traders extremely uncomfortable to see stocks continuing to surge to the upside. CAT bounced back to the upside on Friday, and WYNN surged to the upside as well. This is on top of moves Thursday that were very impressive from stocks such as JNPR and WFMI. There were moves all across the market from many different sectors Thursday and Friday.

It is not just a big rush higher; there are very selective stocks making great moves, but everything is generally drifting to the upside. The market move is extended, but how many times have I said that the market will surprise you in how far it will rally. It will go beyond rational thought and continue to the upside. Recall when they talked about the internet bubble that just had to burst. It was totally irrational, and there were people not buying into it because they said it had to break. Of course it had to break but, as they say, timing is everything.

Many people also like to say you cannot time the market. What they are really saying is, “We do not want to TRY to time the market.” Are we really timing the market, however? No. We are letting the market tell us what to do. We may believe it is topping. We even tried some downside plays on the QQQQ and the SPY, but those lasted about a day before we were out of them. You see it set up and you have a good risk/reward position, but you get out if it does not work.

That is exactly what happened. And what has happened since then? The market has rallied to the upside, thank you very much. Those who do not want to participate are missing out on the great moves we are all enjoying.

MONDAY

This coming week is loaded with data. We have retail sales, the regional manufacturing reports with New York coming out. There are Fed minutes, housing starts, building permits, industrial production and capacity. Of course there is also the usual stuff. We have continuing claims, the Philly Fed, and the CPI is out on Thursday. There will be no dearth of news to help drive the market. That might help since earnings season is winding down and stocks may be looking for another reason to move up.

Think about it. We have fantastic news built into the market. We had an earnings season that surprised everyone again to the upside. It beat some tough comps because last year things were in the pits. It was easy to walk all over your prior year’s competition. Now things are a bit tougher, and they are actually able to beat. Then we have the Egyptian issue, and it seems to be resolving favorably. The military, similar to Turkey, is in charge and keeping things at bay. They are trying to let a little democracy take shape perhaps. That is a good result.

The US economy continues to show improvement. Unfortunately there is a big sector of the economy that is not participating yet, but it is trying to get involved. There may be some help from the Feds, and it might actually do something constructive. I have talked about the shortened SBA form and process that is supposed to hit in March. There may be a few other things coming out. The Treasury announced its plan to wind down Fannie Mae and Freddie Mac, and that is a start. It gives people some hope that some of the right things may be done.

We have some hope, but what do we see in the market? When looking at the SP500, one wonders if it can continue to move higher. I think it can overall. I do not think the run is nearly done. I think this is just the second leg of a breakout, and we could get one, two — maybe even three more such legs on this move. That would take us easily through the end of 2011.

I am hearing it already. “Man, Johnson is off his rocker. He is too bullish. It is time to abandon everything.” You know, I am a skeptic of most everything, but that is what you do. You should be skeptical when you trade. I like to quote a lot of movies in reference to this, like Field of Dreams. “Look for low and away, but watch out for in your ear.” That is one you always have to be careful of. As soon as you are not watching for in your ear, you get it in your ear.

Markets tend to run further than you would ever expect they would, but do not expect that they are going to run. As soon as you expect that your trades will automatically win, the ice gets thin and you will fall. Just as in Shannon’s Deal, that classic, much-heralded-but-apparently-underappreciated television series from the early 1990′s: When you think you know the cards before they are turned over, then you are in trouble.

I am concerned. I think that this move will continue, but you do have to watch out in the short term. Stocks are exploding higher everywhere. There is money hitting this market, coming in as some of the retail investors finally give in and throw some of the money to their brokers or their mutual funds. They are putting that money to work.

We are more than happy to ride the move to the upside. We just have to keep our wits about us and keep reasonable stops. We are still looking at place that offer good risk/reward. They are out there. There are stocks that have not rallied. ISRG had great bases beneath them. They are really set up nicely to take advantage of the rally because they have not rallied that far. Those stocks that have a great base under them still have plenty of room to move, just as I think SP500 and the other indices have.

We look for those that have good risk/reward, and if it does not work out, we will get out. Just like the QQQQ play and the SPY play that we were in for a day before the market went back up. We bailed right out of that. There was good risk/reward and it was worth a shot. We just kept piling into the upside plays, and we have taken a lot of gain since then.

That is how you play it. Do not get too cocky. Look for good moves. If they are not there, you do not take them. If they are there, however, do not sit around cursing at the darkness and saying things cannot keep going up. It can, and we have all seen it happen. Just as in a bear market when you think it cannot keep going down. It certainly can.

We will keep playing it. I will give you a bit of wisdom from another Kevin Costner film, Tin Cup: “You ride her till she bucks you.” That is just what we will do. Ride the trend until it bucks you, but keep your eyes open for in your ear. You can see indications when it is ending that make you naturally want to keep tighter stop losses and maybe not take risks on a few plays. Maybe you will not take as many positions on those plays, but you still ride until you get bucked off.