Obvious Is Oblivious

 | Jan 23, 2012 | 8:45 AM EST
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No question is so difficult to answer as that to which the answer is obvious.
-- George Bernard Shaw

In this market, it hasn't paid to think too hard about the negatives. There is always a bear case, and it has been easy over the past few years to make it. We've had high unemployment, the European sovereign debt crisis, the real estate meltdown and slow economic growth ... but we have shrugged it off more often than not.

Perhaps it is the fact that the negatives are so obvious that keeps them from having any real effect. We have had a perpetual wall of worry, and time and again we end up with these markets where we walk straight up on declining volume in the face of some obvious negatives.

The smart way to deal with this market has been to simply stick with the trend and ignore all the bearish arguments. If you have done that, you are far ahead of the folks who keep looking for a reversal. Of course that isn't as easy as it sounds. Even when you don't fight the trend you can't help but wonder when the day of reckoning will come, and then the big obstacle is that there seems to be a constant lack of good technical setups. There are plenty of stocks with low-volume momentum that are somewhat extended, but the standard big-volume breakout from good bases is becoming increasingly difficult to find when we have these one-way markets.

Some might think that I'm exaggerating the challenges of this market but according to Zerohedge, more than two-thirds of hedge funds are below their high-water marks. In other words, they aren't at their highs even though the Nasdaq is not far form 2007 and 2011 highs. I suspect the main reason for this underperformance is that hedge fund managers have been far too bearish too often. They simply have not been able to stay in tune with a market that has had a strong positive bias for so long.

The big question this week is whether earnings reports will serve as a positive or negative catalyst. There has been much talk about the high numbers of warnings and guide downs. Then on Thursday Google (GOOG) had a particularly poor report, but the old fuddy-duddy technology names like Microsoft (MSFT), Intel (INTC) and IBM (IBM) had strong reports and started to act like momentum stocks. They carried the indices and covered up some rather weak action underneath.

This morning Sentimentrader.com states that of all the indicators that it follows, none are bullish and 30% are bearish. When I read that, my initial reaction is that we'd better be ready for more upside. That sort of perverse thinking has actually been quite effective. I suspect that many of the computers are programmed to create squeezes when the negatives are at extremes. It keeps the whole "wall of worry" thing going and creates a huge supply of dip-buyers who keep supporting the market.

We are looking at a mild start this morning, but I'm playing it very tight. I don't want to fight the strength, as that simply has not worked, but common sense suggests that we not be overly confident as the negatives keep piling up.

Keep an eye on precious metals. That group looks the most intriguing to me.

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