Don't Mistake a Bounce for a Turn

 | Nov 09, 2012 | 7:58 AM EST  | Comments
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Any belief can be justified. But that is why we call it belief, it isn't bound to proof. -- Frederik Kerling

Market players too often rely on faith rather than proof when it comes to the market. They find reasons to believe that the market will act in a certain manner no matter how the market is actually performing. Even in the face of terrible price action there will be those who will tell us that everything is wonderful and that we'll regret not staying highly invested.

Market pundits always talk about how weak action is a great buying opportunity. They form some argument and, even they really can't know how much lower the market will go, they act as if you don't hurry up and put your money at risk you are sure to miss out on all the great opportunities. They don't demand proof of better market health, but simply rely on arguments about fundamental factors that aren't at all certain or even knowable.

In a market like we have at present, when great technical damage has been done, investors need to ponder whether they will simply rely on faith in order to buy or do they demand proof before putting money at risk?  

There is not shortage of arrogant people in the stock market who are convinced that they possess some special insight into the future. Even though the best investors are wrong on a consistent basis, there are some who view the market as a stupid and emotional beast that is never doing the right thing.

The truth is that the vast majority of time the herd that drives the market is right. It is only at extremes that they are proven wrong. Generally, if you run with the herd you will do better than those who try to fight it. At some point things shift and we have to be quick to adjust, but no theories or beliefs or arguments will defeat the herd when it has momentum.

After the hard hit the market has suffered the last couple days there is no question that we are due for some sort of bounce soon. It is practically reflexive that we see a countertrend move after a big drop.

The important thing is to not mistake a bounce for a major turn in the overall trend. There are always going to be some bounces, and some very big ones, within a downtrend. Trade them if you are so inclined, but they are just the first step in proof that things may be shifting.

Make this market prove itself before you put your precious capital on the line.  You can always find some pundit with a theory to tell you to buy. They feel that all that is needed is the power of their intellect. We all know many smart people, but none of them can really understand the way the market beast thinks and act. 

The key to good investing is to put your trust in the way the market actually acts rather than rely on arguments of pundits who usually have an agenda other than your financial well-being.

We have another shaky start this morning, but the bounce buyers are likely to give it a try. Comments by President Obama today about the fiscal cliff are likely to serve as a catalyst.

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