Resistance Is Futile

 | Feb 06, 2012 | 8:37 AM EST
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"Common sense is the collection of prejudices acquired by age eighteen." --Albert Einstein

As the market blasted higher following better-than-expected jobs news, nearly every commentator on Real Money expressed some level of caution.

In view of how we have gone straight up with no rest since mid-December, it isn't surprising that active market players would be looking to increase defensiveness and protect profits as the market becomes more and more oversold. It's common sense to look for a pullback when we haven't had one in a very long time.

Unfortunately, this market has made being cautious look foolish. Many of the arguments for why we are due for a pause could have been made weeks ago. Nothing much has changed except we had some decent economic reports and have become even more extended.

The great difficulty is that there is very little correlation between common sense and accurate market timing. If you try to use logic to determine when the market will make a sudden turn, you will almost always be wrong.

In fact, the tendency is that the more illogical the market action may appear to be, the more it tends to act that way. That is because market players hate losing money, so when the market is doing something they don't expect, they tend to put aside their arguments to the contrary and try to jump on board. As a result, a very extended market, like we had Friday, just keeps running. It might not have been logical to keep on chasing given the technical pattern, but it was a moneymaker and that is all that matters to most traders.

So here we are once again with a market that is obviously extended and in need of a rest. The problem is that it is just too easy to make a bear case here. This market has been walking the high wire and is increasingly unstable, but underlying support is so strong and there are so many underinvested bulls anxious to buy a pullback that it's hard to believe we can see any meaningful downside. Dip-buying has worked extremely well and one thing you can count on from market players is to continue to repeat a pattern that works.

I have to admit I'd prefer a pause to let some of the charts reset. While I like to play momentum, I don't like buying things that are straight-up with no consolidation for weeks. They definitely can keep on running but I find it difficult to aggressively put money to work except for very short term time frames. Unfortunately, the market beast doesn't care what I want, even when I argue that it is just plain common sense.

Hoping for consolidation is not a good way to make money, so my approach is to respect this very persistent trend and keep digging for places to put money to work. Sooner or later, we will correct a bit and I'll definitely be ready for it, but I don't want to stand aside and miss gains in the near term if the trend persists.

If the market had the normal ebb and flow within an uptrend like we used to see prior to the meltdown in 2008-2009, it wouldn't be as hard because there would still be plenty of charts developing. It no longer works that way in this new environment where the moves are totally lopsided. If you aren't in, you really miss out. And since everyone is aware of that, they keep us running.

We have minor weakness on negative growth news from China, but the key to this market remains the dip-buyers. Until the action shows some inclination to stand aside, fighting this market is just plain foolish.

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