Use Caution

 | Feb 02, 2012 | 2:03 PM EST  | Comments
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The dip-buyers saved us once, but the bounce fizzled quickly and we took out the opening lows. We still have underlying support, but the market lacks energy and upside progress is becoming more difficult. Breadth is still solid with oil and gold leading, but volume is lackluster and buyers are more cautious.

As I discussed in my opening post, it's almost impossible not to contemplate the potential for a near-term market top. We have been trending straight up for quite a while and there are plenty of solid bearish arguments to be made, but we are missing one thing and that is price weakness. Until there is some notable softness in the market, it is extremely risky to anticipate a market turn.

I deal with this sort of action by taking profits into strength when I have them and continuing to hunt for new buys. Ideally, I find fewer and fewer buys and end up with more and more cash as the market moves to unsustainable levels.

That works pretty well, but I often end up in too much cash too early because sustainable market levels are higher than anticipated. I can remedy that by using trailing stops rather than selling into strength, but the risk of slippage is greater when a reversal finally does kicks in.

I'm adding a few new buys today but, overall, I'm a net seller because more of my positions look tired. If the market keeps running up without any rest, I'm going to be woefully underinvested. But this market seems to invite that position more often than not.

We are still holding up well and I don't see any reason to rush for the exits yet, but you'll have to force it to continue putting money to work. That's all the warning that I need to proceed with greater caution.

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