How much I missed, simply because I was afraid of missing it. --Paulo Coelho
Strength in Japan and Germany is giving the market a boost this morning. The bears have been growing more confident after two poor days last week but, as is the tendency of this market, it bounced strongly and we are now seeing upside follow-through. The bears are convinced that the sequester battle is going to hit this market eventually but, so far, it is mostly being ignored.
I'm concerned that a topping process has begun, but the important thing to keep in mind is that it is a process, which means there is very likely to be strong action as it plays out. The easiest mistake is to assume that the market will suddenly turn and go straight down. Tops just don't develop in that manner. The normal process is for bounces to occur, which reassure the bulls and keeps things from falling apart too fast.
We saw a good example of this Friday, when the market bounced back after the worst two days of the year. The folks who were worried Thursday afternoon were quick to say that there was nothing wrong with this market and that the selling was just a temporary blip that shook out weak hands. It's regaining its footing and we continue to regain momentum.
While that is possible, my view is that we have to be on guard for further signs of topping action. Recent highs should serve as overhead resistance if that is the case, and we should see a greater inclination to sell into strength. The hallmark of tops is failed bounces, and that is what we have to watch for.
My goal isn't to make a perfect timing call that will gain lots of attention but to navigate the market in a way to make the most money. Calling tops and bottoms is a good way to gain media attention but it is not the best way to trade. You don't maximize gains by going from bullish to bearish in a split second, because that isn't the way stocks behave.
Even if the market is topping, there will be good long trades. If you are too focused on the idea of a top, you are going to miss them. If you went totally bearish after the poor action last week, you have already missed some good bounce action.
On the other hand, we need to take heed when there is a change in market behavior. That did occur, and that means we need to be on guard for further developments. I'm watching closely for more topping action, but I'm not going to be so negative that I forego the opportunities that arise.
A topping process is all about staying opportunistic rather than being ideological. While we have a view of how the market may play out, we don't want that to stop us from seizing the opportunities that are still developing.
This morning the bulls are running and we'll see what they can do. The tendency if for these bounces to go longer than many think is reasonable, but I'm looking for the bears to try to fade this strength.