There's Simply No Reason to Turn Bearish

 | Jan 25, 2013 | 7:46 AM EST  | Comments
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Note: Rev Shark will be off for the rest of the day. His next article will appear Monday morning.

"Facts are stubborn things; and whatever may be our wishes, our inclinations, or the dictates of our passion, they cannot alter the state of facts and evidence." -- John Adams

For a while now, my primary message has been that investors shouldn't try to anticipate a market top. It is such an easy trap to fall into, and I believe it's important to keep reaffirming that message. I have to keep reminding myself of this, as well, because it is so enticing to attempt these market-turn predictions.

While I'm a firm believer in sticking with the trend as long as possible, that doesn't mean being blind to potential negatives. The bears continue rolling out fundamental arguments -- yet my attitude toward them is that they don't matter until they matter. I see little value in dwelling on what potential news is waiting to slam the market. Sooner or later the indices will turn down, and there will be many great reasons to explain why. Lots of bears will breathe a sigh of relief and say, "I told you so." But they will conveniently forgot how poor their timing had been.

My focus, and what determines whether I'm bearish or bullish, is always the price action -- and recently this has been exceptional. Stocks just keep chugging along, and there is plenty of underlying support. The bears might argue that the indices are extended and that sentiment is too frothy, but so far that has not made a bit of difference.

One of the main things I seek in the price action is how the market closes. So far in 2013, and until the last couple days, the S&P 500 has finished at the highs in almost every session. That is a classic sign of a bull market. Money comes in at the end of the day because the institutions anticipate that the trend will continue tomorrow.

On Thursday we saw a softer close, although a late bounce did take the S&P off its lows. It is difficult to be too concerned about that, as the indices held up very well and breadth was solid. What we have to watch for is a series of weak closes. The biggest warning sign that a topping process has started is a strong open, an intraday reversal and a weak close. A number of days like that, particularly on higher volume, would be the sort of price action that would turn me negative on the market.

The other thing we have to watch for is action in individual stocks. It was quite impressive that the overall market pretty much ignored the Apple (AAPL) disaster. The earnings-triggered plummet was treated as a company-specific event, and I don't think that would have been the case a few months ago. The difference here is that the stock has been under pressure for a while, so the issues were already well known, and Apple's tumble didn't really undermine the positives that have been driving the market.

Moreover, we've seen some good leadership in financials and transports, and such stocks as Google (GOOG), Facebook (FB) and Netflix (NFLX) can step up and take over that role. It is when the ranks of the leaders narrow and the momentum starts to sputter that we should be worried.

In all, while it is very easy to keep looking for reasons to not like the market, it is far more profitable to focus on the reasons to stay with the trend. When the price action starts to shift, we'll know it, and we'll be able to move quickly. Don't waste too much energy trying to anticipate it.

I'm going to be on the road today, so I'll see you Monday morning. Have a great weekend.

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