Always Look on the Bright Side of the Market

 | Sep 30, 2011 | 9:10 AM EDT
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"If you don't like something change it; if you can't change it, change the way you think about it." --Mary Engelbreit

After an unusual day of trading Thursday, the indices are set to gap down to start the final day of the third quarter. It has been the worst quarter for the market in a while, but what made it much worse for many traders was the randomness of the action. Stock picking has become largely irrelevant; the only thing that matters lately is the latest headline about Europe.

The action yesterday was a particularly good example of the challenges this market has presented recently. We gapped up initially on news of a German vote dealing with a potential TARP-like plan in Europe. We had a little extra upside generated by a better-than-expected weekly unemployment report, but there were questions about seasonal adjustments.

After yesterday's strong open, we trended down most of the day, but it was unusual that big-cap technology names like Amazon (AMZN), Apple (AAPL) and Priceline (PCLN) were sold aggressively while the rest market mostly remained in positive territory. These stocks have been the best leadership we've had lately, and they tend to be the most likely to benefit from end-of-the-quarter window dressing, so it was particularly unusual to see them under so much pressure.

There was talk that the pressure was due to a large momentum hedge fund closing its doors and liquidating positions. That makes sense and explains the action, but the selling was severe enough to suggest that this fund may not be alone and that there are others raising cash as they anticipate redemptions after they report what is going to be a lousy third quarter.

I'm sure there are traders who are navigating this market environment well, but those I hear from are struggling. The primary problem is the only style that works right now is short-term trading of indices in response to the news headlines. If you are a stock picker, momentum trader, value buyer or just about anything else, this market is simply not offering many opportunities. Even if you are a short-term market timer, the whipsaws have been so severe lately that the chances of waking up on the wrong side of the market are extremely high.

Traders like the idea of making money on a consistent basis but, unfortunately, it just doesn't work that way. For many traders the 80-20 rule applies. They will see 80% of their profits in 20% of the time, and they will make little progress the other 80% of the time. Even if you accept that as fact, it can still be frustrating if you aren't making any progress, especially when you worry that it is not going to improve any time soon.

The one thing that always makes me optimistic when dealing with a difficult market is that I know, without a doubt, that conditions will eventually change. That is the one great certainty about the stock market. So if you just stick with it and navigate through the rough times without losing your capital, you'll be in good shape to make good money again.

Even though the market looks poor, I am optimistic that this is going to lead to a good trading setup for the end of the year. Hopefully the situation in Europe will clarify, one way or the other, and the negativity will give way to a healthy purge of the poison in the system.  Corporate earnings have remained quite good overall, and there are good values out there, so when the mood does change, the conditions will be in place for upside momentum.

Meanwhile, keep slogging away. We have little choice but to stay focused on defense and maybe knocking out some shorter-term trades if we want to gamble on the headlines.

If the market was easy, it wouldn't be so potentially profitable.

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volatility is quite low here, and we could see some downsides here in the short term. ...



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