Guess or Sit?

 | Nov 08, 2012 | 7:47 AM EST
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"And the most dangerous period is the aftermath. It is then, with all his resources spent and his guard down, that an individual must watch out for dulled reactions and faulty judgment." -- Richard M. Nixon

Market players realized on Wednesday that the presidential election hasn't changed a thing. We are still faced with the exact same problems we have been struggling with for years and the gridlock, which has hampered any real solutions, is as entrenched as ever.

What added to the volatility was that the market seemed to have been anticipating a Romney win on Tuesday and when that provided to be incorrect there was some very aggressive reposition. The selling became even worse when fiscal cliff concerns suddenly moved to the forefront and market players realized that we are no closer to a solution than the last time we dealt with the issue.

Not only is the domestic U.S. situation a mess, but there are increased worries that the strong man of Europe, Germany, is starting to feel the impact of the European recession. All major solutions to the European sovereign debt issues revolve around Germany and without their confidence and strength it becomes a far more difficult problem

It is not just the macro, there is the concern it has been a terrible earnings season and many are worried that the fourth quarter may not be much better. In addition the technical situation is providing no comfort. The S&P 500 broke through recent lows at the 1400 level on increased volume and has little, if any, good support. The 200-day simple moving average at 1380 is the next key level and it is hard to look at that chart and not anticipate that it be tested.

The Nasdaq and the IWM look even worse than the S&P 500. Both have already breached their 200-day simple moving averages and are now hanging in space with a vast black hole under them.

There are basically two ways of dealing with the current situation. You can keep on trying to guess when a reversal will kick in or you can sit and wait for a solid bottom to form and the action to improve.

My choice is the latter. I always respect momentum and it is clearly to the downside at this point. You can garner much attention by making big bold calls about how things are about to shift, but I'll bet big money that the vast majority of these calls are poorly timed and end up losing money for those that follows.

The one great truth I have learned about the market over the years is that trends almost always continue longer than you think is reasonable. Markets almost always will go higher or lower than most pundits believe is likely and you do much better if you simply respect the momentum until there are clear signs that it is ending. You can still do some counter-trend trading and focus on short term opportunities, but overall the key to market success is the respect that trend.

In the very early going things are flat, but we should have some interest-rate news out of Europe, a number of earnings reports and the weekly unemployment data to move things around. One group I'll be watching closely today is gold, which offered a few interesting charts.

Columnist Conversations

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



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