Tune Out the Noise

 | Dec 06, 2011 | 8:52 AM EST
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"Don't find fault, find a remedy; anybody can complain." --Henry Ford

I've spent quite a bit of time recently writing about the challenges of this market. Despite a huge move over the last six days, it has not been an easy market to trade. All the profits have occurred overnight; there has been no clear leadership or exceptional areas of speculation, charts and entry points have not developed well and we have gone from oversold to overbought in a blink.

Typically, the best way for a stock market pundit to handle market action like this is to celebrate how wonderful it is and to make it sound like the river of gains is overwhelming. It is interesting how often a commentator who was bearish at the lows now makes it sound like he was never on the wrong side of the market. Making it sound like you never had a losing trade actually fools quite a few readers.

While writing about how much you like the market and how well you are doing can create a great image for public relations purposes, it isn't helpful for readers who are trying to navigate the market. A reader who is having a hard time doesn't want to hear about how well others are doing. They want to know what they can do differently and how they can be in better tune with the market action.

Don't let anyone fool you into thinking that just because the market went straight up for six days that it is easy to rack up huge gains. It is great if you are a buy-and-hold type that was feeling anxious a week or so ago, but you more than likely just recouped losses rather than made profits. If you were correctly defensive a short time ago, it was nearly impossible to suddenly turn so bullish that you would ride four gaps in six days. Even if you caught the original turn and made some good money any prudent trader would have likely taken some profits too early.

I've heard from an unusually high number of traders who are feeling discouraged lately. When the market is going down and you aren't doing much, you have the comfort of relative outperformance. However, in the current environment it is just the opposite. Not only do you struggle to make actual gains but you have the added insult of underperforming even when you are making money.

For me, the number one challenge of this market has been to adapt to a situation where determining market direction is more important than individual stock picking. My primary edge in the market has always come from finding good stocks at an early point. Timing the market was secondary, as good stock picks would tend to perform even with the broader market was not acting so well.

That has changed recently. Part of it is due to exchange-traded funds, which are all about direction bets and computerized trading and tends to push huge baskets of stocks one way or the other without regard to individual fundamentals. As a result, stocks are highly correlated now and they all move together in one direction or the other. There are few strong leaders and not many themes since all that really matters is the overall direction of the SPDR S&P 500 (SPY).

There are still good individual stock picks to be found, but it is much more selective and narrow. Also, time frames are shorter and if you catch a good move, you can't overstay your welcome.

I'm working hard to develop new ways of approaching this market but I don't expect it to be easy. The reason the market is so potential lucrative is because it is such a challenge.

I'm going to continue to point out the challenges and difficulties I see and report the mood of traders who are trying to deal with this market. It isn't what it used to be and we need to embrace that fact as we look for new ideas.

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