Give the Market Time to Prove Itself

 | Feb 05, 2013 | 8:35 AM EST  | Comments
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One timely cry of warning can save nine of surprise. --Joshua Thompson

The market's recent uptrend is showing signs of sputtering. So far, the pause in the action hasn't advanced past healthy consolidation, but three of the last four trading days have closed at the lows and many individual stocks are acting poorly.

The bulls are quick to point out that volume has been light and we are just barely off recent highs. After the run we've had this year, a pullback is not surprising and actually is quite healthy.

The bears, on the other hand, are gaining confidence. They have been predicting a market top for weeks and have a long list of fundamental issues that they are sure will plague the market in the months ahead. The bears have had lousy timing, but it is important to see if the market embraces some of these negative arguments. Yesterday, renewed strife in Europe really drove the selling and we have to watch for other issues to bubble up as well.

I've been counseling that the way to approach this market is to stay bullish until there actually is negative price action. While it hasn't been terrible, there is some poor action and it requires caution.

What bothers me most about is the action in individual stocks. We don't have any good leadership and too many top stocks are faltering. Amazon (AMZN), for example, spiked on earnings but has been under pressure ever since. Groups that have done well, like homebuilders, are showing signs of fatigue and it is tough to find a sector or theme that is attracting momentum money.

The dilemma in this market is respecting the weaker price action but not being so bearish that you eliminate the possibility that this is a healthy pause that sets up more upside. My bias leans toward a topping process, but I don't want to jump the gun and be too negative too fast. I want to give the market time to prove itself. I am concerned about this action but it hasn't quite crossed the threshold to make me declare that a top is forming.

There's early strength despite poor reports from Yum! (YUM), Baidu (BIDU) and a couple of others. This will be a good test for the market. If there is concern that a top is forming, we should see strength sold more aggressively and less inclination to buy dips. Lately, the weak closes have been worrisome and we need signs that we are going to overcome that.

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