Rooting for Weakness

 | Feb 03, 2012 | 8:22 AM EST  | Comments
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"It's just a job. Grass grows, birds fly, waves pound the sand. I beat people up." --Muhammad Ali

Early indications are positive as we await the very important monthly jobs report. With the market running straight up on diminishing volume for weeks, the risk of a sell-the-news reaction to the report is high. Given how aggressive the dip buyers have been for quite a while, you have to wonder how long any pullback might last.

I can come up with a long list of reasons why this market is about to weaken, but they will be the same reasons that haven't mattered for quite a while. Sticking with the trend has been the smart approach, even if you have don't believe there is good reason for it to persist.

If you are inclined to be bearish, one important thing to keep in mind is that markets at their highs generally just don't reverse and go straight down. Topping action usually takes time. The dip-buyers who have had so much success don't just disappear, and the folks who have been riding momentum don't give up completely. It usually takes a few downward stabs before folks start to give up and become more aggressive about protecting profits. There can be some sudden drops when bids disappear but the first few pullbacks will usually find some support and we'll see some recoveries. It is only after a series of failed bounces that a real trend reversal might start to kick in.

Even if we do finally have a bit of a reversal in the indices, one thing that I've found very encouraging so far in 2012 is that we have less correlated action. You still have to dig for opportunities but individual stock picking is working much better than it did in the latter half of 2011. Even when the indices aren't doing much, there are pockets of good trading action. The speculative action is better and we aren't hostages to the headlines out of Europe like we were for so long last year. That could change, but there is obviously a hunger for action and that is what makes for better trading.

My approach to the market is to fight my natural inclination to call a top and keep hunting for long trades. As we become more technically extended and volume drops, it becomes increasingly difficult to put cash to work, so that actually puts me in a contrary position -- but it is far less dangerous than trying to actively short a market that refuses to go down.

I have a few things on my long radar, such as the solar energy sector, but we'll see what the jobs report brings and go from there. I have to admit, I'm rooting for some weakness at this point because it would give us some better trading action if we had a little back-and-forth action to set some new things up.

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