"Jumping at several small opportunities may get us there more quickly than waiting for one big one to come along." --Hugh Allen
Despite a long list of divergences, persistent bearish arguments and tired market action, the major indices continue to hold up extremely well. The most remarkable thing about this market is that the single biggest one-day drop in the S&P 500 this year is 0.69%. We have had two other days with loses of a little more than 0.5%, but there has been no significant pullbacks at all. When we have dropped intraday, the dip-buyers have quickly gone to work and we have not put together any successive weak days.
The natural response by market pundits to this lopsided action is to continually look for reasons why it can't continue. We all know that markets don't go up in a straight line forever so, of course, we keep trying to predict when the change in direction might occur.
The problem with this game of top calling is that you can miss some very good gains if you are too early in your negativity, as has been the case for most everyone who is bearish. The market continues to hold up despite the weight of all the pessimistic logic out there.
The dilemma for traders is that the bearish arguments do make sense, but the market isn't listening. Do we embrace what seems logical, or do we stick with a market that confounds it?
My approach is to stick with the market until it gives me a good reason not to. The important thing is not to be overly slavish to the indices. Too much of the discussion about tops and turns treats the market as a monolithic beast where all stocks act in tandem. It is true that stocks do act in correlated fashion to a great degree, but when dealing with an extended market like the one we have now, the key to success is looking for things that are showing some independence of action.
For example, the real reason the indices have been holding up so well lately isn't because the great bulk of stocks are acting so well. In fact, many small-caps are correcting dramatically. The reason the markets hold up is because a few big-caps like Apple (AAPL), IBM (IBM) and Microsoft (MSFT) are showing relative strength. That is where the outperformance has been produced recently and that has been a good place for the bulls to stay parked.
Themes such as big-caps being aware of sector rotation can also help you deal with a market that is tired, but not yet cracking. For example, one of the leading groups in January was biotechnology. That group has weakened in recent days as the overall market has flat-lined, which is an indication of some of the problems the bears are pointing too. On the other hand, money has flowed into precious metals for a few days now and that group has rallied nicely.
So, we have money moving from a speculative group like biotechnology and into a defensive group like precious metals while a few big-caps prop up the indices. Obviously, betting on the major indices is not the smart way to play this action because they have barely done a thing. Maybe the indices will break down more in the near term, but until they do, we need to watch the action under the surface if we want to profit.
I'm watching very carefully for further pullbacks in the indices; at the same time, I'm hunting for good long opportunities like precious metals. Just because you believe the market may be close to correcting, it doesn't mean you can't do some buying.
We have slightly positive action in front of the weekly jobless claims reports, which should set the tone for today.
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