Keeping Cautious

 | Oct 03, 2012 | 8:36 AM EDT
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It would be better for us to have some doubts in an honest pursuit of truth, than it would be for us to be certain about something that was not true. --Daniel Wallace

A late bounce on Tuesday saved the market from another red close, but it has been very slow going lately with limited upside momentum. There isn't any significant downside so far, but the market is really struggling to regain the momentum it enjoyed all summer.

The bulls' spin on this action is that it is just healthy consolidation after a good run. We haven't had a correction in a while and they see this action as nothing more than overdue profit taking that will eventually set the stage for further upside. The bulls believe that sentiment is already too negative and that expectations for third-quarter earnings are low enough so that the weak economy in Europe won't come as a major surprise.

More often than not, the bullish view has been the right one since the bottom in March of 2009. The bears, who are convinced that the other shoe is about to drop, have been waiting for more than three-and-a-half years. They were crushed when the market roared back from corrections in both mid-2010 and the summer of 2011 and have proved over again that it is futile to fight the central bankers.

One of the most dangerous things you can do in the market is to proclaim that it is different this time. While I've been more bearish lately and writing that we are undergoing a topping process, I'm always prepared to change my mind should the price action shift.

The best traders always have an open mind and are quick to admit when they are wrong; however, I see no reason to believe that this correction is not going to develop further. I expect that we'll have some upside action that will make the bulls more comfortable and suck in the folks who were dithering. Then the real test of this market will be whether a bounce fails and hits a lower low. More often than not, this market has produced V-shaped moves straight up to the highs and that crushed the skeptics. Failed bounces are what downtrends are all about, and we just don't see them like we used to.

Regardless of what happens, it is going to be earnings season that is the catalyst and again the bulls have had the edge there. Since the lows in 2009, we have had consistently good earnings. Although the economy has sputtered, we haven't seen that reflected in corporate earnings to any great degree. The concern this time is that Europe is going to be the big excuse for weak numbers but many are confident that this is already well anticipated and that expectations are low enough so that we won't see any big sell-offs.

I'm not impressed by the price action lately and I'm staying cautious. I believe we're going to have a good "suck in" bounce soon and the test will be whether momentum is regained. I'm skeptical but ready to change my mind if the action improves.

Sarepta (SRPT), a recent stock of the week and one of my favorites, will be the star of the show today on some exceptionally strong results for its muscular-dystrophy drug. I believe it will continue to run and I'm in no rush to sell.

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