Embrace Momentum or Anticipate Bearishness?

 | Jan 15, 2013 | 8:24 AM EST  | Comments
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All styles are good except the tiresome kind. --Voltaire 

The market action is slow. There are a couple of earnings warnings and the bears say that investors are too complacent, but the market has yet to do anything wrong. In fact, the market continues to hold up extremely well and is doing a nice job of consolidating the big gain triggered by the fiscal-cliff deal. The market trend remains positive.

The question that market players need to ask is whether to stick with the market as long as it acts well and holds up or start anticipating problems and adopt a bearish bias. In other words, embrace momentum or anticipate bearishness? I tend to embrace momentum, while investors like Doug Kass prefer to anticipate bearishness.

Even though I have a personal bias about how to approach the market, I strongly believe that no approach is inherently superior. I use a momentum approach because it works best for me, but someone else may find that an anticipatory approach fits their personality better and may produce better results. A good anticipatory trader will beat a bad momentum trader, and vice versa.

Doug Kass posted a long list of market negatives Monday, and he mentions the high level of complacency this morning. He says he is now about 30% net short. He obviously feels that significant downside is coming soon.

While I don't disagree with Doug's arguments, I'm not sure about the timing. I have found that I do better if I wait for actual weakness to occur before taking a more bearish stance. It has nothing to do with disagreeing about fundamental factors. I have simply found that the market can ignore obvious negatives for a long time. Strong markets tend to stay sticky to the upside and the biggest mistake that many people make is to underestimate the power of the uptrend.

I don't know how many times over the past few years we have had uptrends that just keep on going despite the feelings of many that it was unreasonable to do so. Logic about fundamental problems just doesn't work when trying to time the argument. We just never know when the market will decide that certain negatives are going to matter.

I don't mean to imply that I'm just blithely long and don't have a worry in the world. In fact, I've been raising cash lately simply because I'm finding fewer stocks I want to buy. On the other hand, I have no aversion to buying if I see setups I like and I don't have much interest in shorting until there actually are some breakdowns.

Everyone has to find a way to approach the market that fits their personality. I find that sticking with the trend and not constantly trying to call tops works best for me. I know that I can move very quickly when conditions change, so I'm not worried about anticipating.

 Too often small active traders handicap themselves by trying to trade like bigger, slower moving funds that have to anticipate. If you aren't a fund you don't need to trade like one and probably are better off if you don't.

 We have a slow start again this morning and I'm already tired of hearing about Dell (DELL), which has been a dog for the last 15 years or so. Earnings are coming soon and that should give us some excitement. But for now, it looks like we are just treading water.

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