Are the Bears Still Crying Wolf?

 | Mar 29, 2012 | 8:43 AM EDT
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Some people are making such thorough preparation for rainy days that they aren't enjoying today's sunshine. --William Feather

After two days of weakness, the big question is whether we are finally starting to see a change in market character. We have had an extraordinarily strong and lopsided move with no notable pullbacks during the first quarter of 2012 and now the bears are chattering that the trend is due to come to an end on a final burst of end-of-the-quarter window dressing.

Of course, the bears have had plenty of other arguments for why the market was about to fall apart. High oil, continued issues in Europe, stretched valuations, the end of quantitative easing and so on have all proved to be ineffective in stopping this market. While the bearish arguments have sounded quite logical and persuasive, they have not mattered.

The lesson is that it is futile to try to time a market turn based on fundamental arguments. The fundamentals only matter when the market says they matter and, so far, the market isn't much interested.  At some point, we'll see some significant downside and the headline writers will trot out all the bearish arguments that haven't mattered as justification for the move and they will finally be right.

Our job is to be ready to react quickly when the day comes that the negatives matter. Do the dip-buyers back off, and do the bounces start to fizzle out faster? Does the negative news finally provide an excuse for selling rather than an opportunity for more buying?

Probably the most difficult thing about making this determination is that so many market players are inclined to believe the market has already run too far for too long. It is common sense to look for a reversal soon, but that has been the case for a while and when it doesn't happen, it tends to keep the market trending even longer.

The most important thing to do when you are worried about a market turn is to manage your individual positions more closely. Set stops tight, cut losers quickly and take some profits when you have them. If you do that, you will find yourself holding higher levels of cash if the market does falter.

The major damage in a downtrend is always a product of inaction as conditions change. Many folks try to avoid that by constantly trying to call a top. I've found that you miss out on too much upside when you do that and you can still protect yourself by acting in a defensive manner once things deteriorate. They key is to stay disciplined and not hesitate when trouble begins to brew.

We have a soft open this morning that will be a good test of the dip-buyers. What we are watching for are failed bounces and breaches of early support. If that continues then hit that eject button and raise more cash. You can always rebuy and you are much better off if you avoid having to recoup losses.


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