The Pause That Refreshes

 | Feb 10, 2012 | 8:50 AM EST
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"The Pause; that impressive silence, that eloquent silence, that geometrically progressive silence, which often achieves a desired effect where no combination of words, howsoever felicitous, could accomplish it." --Mark Twain

There is no shortage of indicators lately showing that the market is at an extreme level and vulnerable to some sort of pause. Market players have ignored worries and stick with the upside momentum, but there is stumbling this morning as the European Union continues to struggle closing an austerity deal for Greece.

The cynical bears are already saying that this will just setup another "Greece is saved" rally down the road. Of course, the dip buyers see nothing but another opportunity to continue buying. Jumping on an early pullback has been the way to coin gains lately.

In view of how tenacious the underlying support has been lately, it would be naïve to worry that we could see any meaningful downside. If you are inclined to be defensive, the best approach is to wait to see what sort of bounce ensues and then sell only if opening levels are breached.

According to, Thursday was only the second time in 30 years that the S&P 500 has closed in the top 20% of its intraday range for five straight days while at a six-month high. The last time that was on March 20, 1998, and that ended up being a short-term top.

The key point is that it isn't just hyperbole that the market has had tremendous underlying support. Support that tough doesn't suddenly disappear without good reason. Selling off this morning on Greece worries is more of an invitation to buy rather than panic sell, given how ineffectual the pullbacks have been lately.

The most important thing to keep in mind about dip-buying is that it tends to persist and doesn't disappear until the dip-buyers are badly stung a few times. Once we have a failed bounce or two, the dip buyers are likely to be less confident and the chances of more aggressive downside will grow.

So far, we haven't had any failed bounces but we will have a good opportunity today on this soft open. If the bulls are turned back and we close weak, we will need to raise our caution levels quickly. But over-anticipating downside has been one of the easiest mistakes to make lately.

I've been in a more defensive posture lately, not because the market is doing something wrong and I'm bearish, but because I'm finding it more and more challenging to find good buyable charts. When we have such lopsided action, my methodology of taking partial profits into strength results in higher levels of cash because there are so few new places to deploy it until the market rests.

I don't expect this market to fall apart and go straight down, but sooner or later we will have some consolidation and resets and that will give us a new crop of opportunities. For now, we just have to be patient as these overbought conditions eventually dissipate. A poor open and then a failed bounce would end up being very bullish for the longer term.

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