Cautious but not negative

The market acted the way it should on Friday, trapping the late bulls. Even though I am cautious I am not negative in the long run on the markets. The market is in correction mode. Where it goes from there , I will play week by week. Corrections in bull markets are sharp and vicious shaking out most late bulls and offering a mirage to short sellers and bears. It is too early to say the rally is over.

As a practical matter, it makes greater sense to respond to known market conditions,like breakouts, relative strength, earnings, momentum etc. In that thinking mode it allows allow you to adjust our stance as conditions change. Conversely, if you position yourselves based upon a macro prediction about the future, you are stuck with defending that prediction until it comes true or sticking with it until you lose enough that you are forced to capitulate.

Market action during the period from May 2006 to the present serves as a prime example of how the hypothesis based investor miss good profit opportunities. During the decline from the May top it was broadly accepted that the bull market top was finally in place and that a major decline was beginning. The rally out of the summer lows was dismissed initially as a short-term technical bounce in the context of a longer-term decline. The bears held fast. They became vociferous. As prices approached the level of the May top, they hoped that a bearish double top was forming. The bears stuck to their hypothesis.

Now the last couple of weeks of rally left the bears with little on which to hang their hats. It is easy to tell apprenticed investor to trade what you see and not what you think, but hard to practice for the gurus themselves.


There are number of negative things in the news cycle for the market to keep climbing wall of worry. The negative or just barely positive GDP number is what is making bears excited. But the market is forward looking mechanism, so it might have discounted that and may be looking many quarters ahead.

GDP, housing, wage growth, etc. might get macro analyst all excited but as a trader you can not trade based on it. As a trader when you look at a piece of data your first question should be what is the trade in this. Does it indicate long or short or neutral trade. Next set of questions should be has the market discounted this news or is surprised by it.

The earnings continue to show a good picture and many of the stocks which had earning acceleration and earning surprise have a long way to go. Overall market action may dampen their rallies for sometime but with a good catalyst, they will resume their upward climb.