Don't Call for Tops, Watch Signs

 | Jan 29, 2013 | 7:37 AM EST
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When you reach the top, keep climbing. -- American Proverb

The bears have been trying to call a market top ever since the big gap up to start the new year. We keep hearing about the negatives out there, the giddy sentiment and how this run can't possibly last much longer. 

Of course, the bears have been dead wrong about this market and have lost considerable money with their poor timing, but if you keep calling for a top long enough you will eventually be right. You will  be buried with big losses, but sooner or later that pullback will come and you can be sure that the bears will be quick to point out how astute their pessimism has been.

The gurus deal with this by completely ignoring the fact that they were first bearish many weeks ago at lower prices. They will pretend that they immediate have gains on any weakness, even though the market is still far above the point where it was when they first said it couldn't go much higher.

The pundits and gurus will try to make it sound like they are racking up the big gains with their predictions, but if you dig a little you will know that isn't true.  If the market starts to weaken now there is going to be no shortage of celebration by people who are still losing money.

Rather than play this ridiculous game of being a market-timing guru, my focus recently has been to try to keep you in the market as long as possible so you can enjoy the gains that come when momentum continues to run. That has worked pretty well. Trying to call a market turn has been tremendously costly, but just because we stick with the trend doesn't mean we ignore warning signs as the character of the market action develops.

My thesis has been to wait for the price action to shift before you start to worry about a market reversal. So far the indices continue to hold up extremely well, but there are a few warning signs developing and we need to be ready to shift our market bias.

The biggest problem right now is that we are starting to see more selling of the stocks that have led the market recently. We have had some very strong momentum, but there is some growing hesitancy to chase as things become more technically extended.

When I start seeing some negative development like this I don't turn aggressively bearish, but I start thinking about a topping process. Markets don't just run up and then run back down. Tops take time to form and there will continue to be some good upside action as a top forms. If you are too bearish too fast you will miss out on some good positive action.

At this point the market hasn't even done enough wrong to say that a topping process is starting, but we have to watch for more evidence of problems.  Some weak responses to earnings from VMware (VMW) and Seagate Technology (STX) this morning may be another problem.

If we see some red on the screens, today the bears will be howling that they told us so, but we continue to ignore them and stay focused on the price action.  If you stay disciplined and manage your positions will you will hang on to some nice recent gains. You don't have to pretend to be a psychic to beat the market.

We have some softness this morning, but nothing too severe so far. Until the market has a weak close I'm not going to be too negative.

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